Chapter 18 Testbank Solution Manual Management Accounting

Chapter 18 Testbank
Student: ___________________________________________________________________________
1. The concept of cost volume profit analysis is based on classifying costs as
A. fixed and variable costs.
B. variable product and period costs.
C. product controllable and uncontrollable costs.
D. fixed and variable costs AND variable product and period costs.
2. The break-even point is that level of activity where
A. total revenue equals total cost.
B. total revenue equals fixed cost.
C. total revenue equals variable cost.
D. total revenue equals product cost.
3. The contribution margin per unit is calculated as the difference between
A. sales revenue per unit and fixed cost per unit.
B. sales revenue per unit and variable cost per unit.
C. sales revenue per unit and product cost per unit.
D. fixed cost per unit and variable cost per unit.
4. The break-even point is calculated by
A. sales volume  unit selling price / sales volume  unit variable cost.
B. variable costs / total revenue.
C. fixed costs / unit contribution margin.
D. variable costs / unit contribution margin.
5. Ribco Company Ltd makes and sells only one product. The unit contribution margin is $6, and the break-even point in
unit sales is 24 000. What are the company's fixed expenses?
A. $400 000
B. $14 400
C. $40 000
D. $144 000
6. The contribution margin ratio is (all on a per unit basis)
A. the difference between the selling price and the variable cost.
B. variable cost divided by selling price.
C. contribution margin divided by selling price.
D. contribution margin divided by fixed cost.

7. The break-even point in sales dollars can be calculated by dividing
A. fixed expenses by the unit contribution margin.
B. variable expenses by the unit contribution margin.
C. fixed expenses by the contribution margin ratio.
D. variable expenses by the contribution margin ratio.
8.
The firm's fixed costs are $60 000, variable cost per unit is $15 and selling price per unit is $20. The contribution margin per unit is

A. $5.
B. $15.
C. $20.
D. $35.

9. The firm's fixed costs are $60 000, variable cost per unit is $15 and selling price per unit is $20. The break-even point in
units is
A. 1715.
B. 3000.
C. 4000.
D. 12 000.
10. The firm's fixed costs are $60 000, variable cost per unit is $15 and selling price per unit is $20. The break-even point
in sales dollars is
A. $80 000.
B. $120 000.
C. $240 000.
D. $300 000.
11. The firm's fixed costs are $60 000, variable cost per unit is $15 and selling price per unit is $20. The contribution
margin percentage is
A. 2.5%.
B. 25%.
C. 33%.
D. 400%.
12. Epex Pty Ltd makes a single product. Annual fixed expenses are $48 000 and the contribution margin ratio is 30 per
cent. What volume in sales dollars is necessary for Epex to achieve a target profit of $15 000?
A. $63 000
B. $90 000
C. $160 000
D. $210 000

13. If the contribution margin is $10, the selling price per unit is $25 and the fixed costs are $45 000, what is the number
of units that must be sold to break even?
A. 4500
B. 4000
C. 3000
D. 1800
14. If the contribution margin is $10, the selling price per unit is $25 and the fixed costs are $45 000, to earn a targeted
net profit of $50 000 the total dollar value of sales must be at least
A. $10 000.
B. $112 500.
C. $122 500.
D. $237 500.
15. The difference between the budgeted sales revenue and the break-even sales revenue is the
A. unit contribution margin.
B. contribution margin percentage.
C. safety margin.
D. operating leverage.
16. Suppose fixed expenses were to increase by 5.9 per cent. How would this affect the break-even point?
A. The break-even point in units would rise 5.9 per cent.
B. The break-even point in dollars would rise 11.8 per cent.
C. The break-even point in dollars would rise by more than 5.9 per cent.
D. The break-even point in dollars would fall by more than 5.9 per cent.
17. Suppose variable expenses were to decrease by $3.00 per unit. What effect would this have on the cost volume profit
analysis?
A. The unit contribution margin would rise by $3.00.
B. The break-even point in units would increase.
C. The break-even point in units would decrease.
D. The unit contribution margin would rise by $3.00 AND the break-even point in units would decrease.
18. Which of the following changes will affect the unit contribution margin?
A. Changes in fixed cost
B. Changes in variable cost per unit
C. Changes in selling price per unit
D. Both changes in variable cost per unit AND changes in selling price per unit
19. Suppose the selling price per unit increased from $5.00 to $6.00 per ticket. What effect would this have on the cost
volume profit analysis?
A. The contribution margin would increase.
B. The contribution margin would decrease.
D. The contribution margin would increase AND the break-even point in units would decrease.

20. Assume that selling price is greater than variable cost. Now suppose the selling price and the variable cost per unit
increase by $5.00. What effect would these changes have on the contribution margin in dollars and on the contribution
margin ratio?

Dollar contribution margin Contribution margin ratio

A.
Increase Increase
B.
Decrease Decrease
C.
No change No change
D.
No change Decrease
21. The total contribution margin is calculated as the difference between
A. sales price and variable cost per unit.
B. sales price and fixed cost per unit.
C. total revenue and total variable cost.
D. total revenue and total cost.
22. Cost volume profit analysis is based on certain general assumptions. Which of the following statements about these
assumptions is/are true?
A. The price of the product will remain constant as volume varies within the relevant range.
B. Expenses can be categorised as fixed, variable or semivariable.
C. Total fixed costs remain constant and unit variable cost remains unchanged as activity varies.
D. All of the given answers
23. Under an activity-based costing system, the break-even point in units is calculated by
A. total non-volume activity cost / selling price per unit – fixed cost per unit.
B. total non-volume activity cost / selling price per unit – unit level cost per unit.
C. total non-volume activity cost / contribution margin per unit.
D. total fixed costs / contribution margin per unit.
24. Which of the following are advantages of an activity-based costing approach to cost volume profit (CVP) analysis as
compared to a CVP analysis based on traditional product costing?
A. Unit variable costs are recognised more clearly.
B. Fixed costs are viewed as fixed only with respect to changes in sales and production volume, but not as fixed with
respect to changes in other cost drivers such as number of set-ups and number of material moves.
C. The assumption in traditional CVP analysis that sales and production volumes are equal can be relaxed.
D. Unit variable costs are recognised more clearly AND fixed costs are viewed as fixed only with respect to changes in
sales and production volume, but not with respect to changes in other cost drivers such as number of set-ups and number
of material moves.

25. Which of the following assumptions is made when doing a cost volume profit analysis based on activity-based
costing?
A. Sales volume equals production volume.
B. As production volume changes, the number of set-ups, inspections, material moves etc. does not change.
C. The purchase price of raw materials per unit remains constant.
D. Sales volume equals production volume AND the purchase price of raw materials per unit remains constant.
26. The extent to which an organisation uses fixed costs in its cost structure is called
A. financial leverage.
B. operating leverage.
C. fixed cost leverage.
D. operating leverage AND fixed cost leverage.
27. If total costs remain the same, the smaller the proportion of fixed costs in a firm's cost structure
A. the greater the impact on profit from a percentage change in sales volume.
B. the smaller the impact a percentage change in sales volume will have on profit.
C. the lower the contribution margin.
D. the smaller the impact a percentage change in sales volume will have on profit AND the lower the contribution margin.
28. If the operating leverage factor is known, which of the following can be determined?
A. Contribution margin ratio
B. Contribution margin in dollars
C. Break-even point in sales dollars
D. Percentage change in profit for a given percentage change in sales
29. Alclear Pool & Spa presently provides a weekly maintenance service to 150 homes. Variable costs amount to
approximately $12 per week for labour, mileage, chemicals and other supplies. Fixed costs are approximately $13 000 per
quarter (13 weeks). Customers pay $270 per quarter for the weekly service. All contracts are written for one quarter (13
weeks).
Determine the number of customers (rounded) to break even.
A. 95
B. 103
C. 114
D. 197
30. Alclear Pool & Spa presently provides a weekly maintenance service to 150 homes. Fixed costs are approximately
$13 000 per quarter (13 weeks). Customers pay $270 per quarter for the weekly service. All contracts are written for one
quarter (13 weeks). Now assume the contracts with customers are restructured such that the price per quarter is $300
and the contribution margin percentage is 57 per cent. Assume the tax rate is 25 per cent.
Determine the sales dollars (to the nearest $100) necessary to obtain an after-tax profit of $9600 per quarter.
A. $39 600
B. $45 300
C. $52 900
D. $90 200

31.
Maxie Pty Ltd makes and sells two types of shoes, Plain and Fancy. Product data is as follows:

Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000.
Determine the weighted average unit contribution margin.

A. $17.00
B. $9.25
C. $9.00
D. $4.80

32.
Maxie Pty Ltd makes and sells two types of shoes: Plain and Fancy. Product data is as follows:

Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000 and the sales mix remains constant.
Determine the total number of units Maxie Pty Ltd must sell to break even.

A. 9375
B. 5000
C. 4737
D. 2647

33.

Determine the number of units of Plain and Fancy respectively that Maxie Pty Ltd must sell to break even.

A. 2000; 3000
B. 0; 5000
C. 5000; 0
D. 3000; 2000

34.

How many units of Fancy must Maxie Pty Ltd sell to earn a target profit of $31 500?

A. 3400
B. 2000
C. 7286
D. 8500

35.

Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000 and the sales mix remains constant. Assume an
income tax rate of 20 per cent.
How many units of Plain must Maxie Pty Ltd sell to earn an after tax profit of $18 000?

A. 4500
B. 7875
C. 3960
D. 8437

36.

The break-even point for this data is 5000 units in total. How will the calculation of the break-even point change (if at all) if the relative
percentages of the products in the mix change from 60 per cent Plain shoes to 40 per cent Fancy shoes?

A. The break-even point in total will not change. The only change will be the relative number of each of the units.
B. Neither the break-even point in total nor the relative number of each of the units to produce at break-even will change.
C. The break-even point will change because the calculation above assumes a constant mix, namely 60 per cent to 40 per
cent.
D. The break-even point will be higher.

37.
Econ Pty Ltd produced and sold 45 000 units of a single product last year. Data concerning the year's profit and loss statement are as
follows:

What was Econ's total contribution margin for the year?

A. $495 000
B. $540 000
C. $724 500
D. $810 000

38.
Econ Pty Ltd produced and sold 45 000 units of a single product last year. Data concerning the year's profit and loss statement is as
follows:
What was Econ's break-even point (rounded) in unit sales?

A. 36 000
B. 24 000
C. 25 411
D. 26 832

39.
follows:

What was Econ's break-even point in dollar sales?

A. $720 000
B. $762 330
C. $1 080 000
D. $1 134 000

40.
follows:

What was Econ's operating leverage?

A. 4
B. 5
C. 6
D. 7

41.
follows:

Assuming sales revenue increases by 15 per cent, what will be the percentage increase in profit before income tax?

A. 15%
B. 45%
C. 60%
D. 75%

42.
follows:

Assuming all cost relationships will remain constant for the coming year, how many units must be sold for the company to earn an
after-tax profit of $180 000 if the income tax rate is 40 per cent?

A. 45 000
B. 47 500
C. 61 000
D. 70 000

43. Under activity-based costing systems, break-even point in units treats which costs as included in the numerator?
i. Batch costs
ii. Product costs
iii. Faculty level costs
A. i and ii
B. i and iii
C. ii and iii
44. The firm uses activity-based costing and has the following cost structure: selling price $50, batch cost $20 000, unit
level costs $30 per unit, facility costs $120 000 and product costs $60 000. What is the break-even point in units?
A. 6000
B. 7000
C. 9000
D.
10 000
45. Cost volume profit analysis, including customer-related costs, must incorporate which of the following costs:
i. market level costs
ii. customer level costs
iii. order level costs
iv. batch level costs
A. i and ii
B. ii and iii
C. i, ii and iii
46. Which of the following statements applies to cost volume profit and sensitivity analysis?
i. Only one variable is changed.
ii. All variables are changed.
iii. One or more variables are changed.
iv. Only one set of variables need be assessed.
A. i
B. ii
C. iii
D. iv
47.
‘Goal seek' analysis provides for which of the following?
i. An output for a given set of inputs
ii. Required inputs for a given output
iii. A range of outputs for a range of inputs

A. i
B. ii
C. iii
D. None of the given answers

48. Which of the following do limitations of cost volume profit include?
i. Not all costs can be classified as fixed or variable.
ii. Revenue changes may not be linear.
iii. Sales volume is the only cost driver.
iv. Inventory levels do not change.
A. i and ii
B. i and iii
C. i, ii and ii
49. Which of the following are assumptions of cost volume profit analysis?
i. Sales mix is constant.
ii. External factors do not change.
iii. Fixed costs change with sales volume.
iv. Variable costs are constant per unit of sales.
A. i, ii and iii
B. ii, iii and iv
C. i, ii and iv
50. Your local pizza parlour has annual fixed costs of $20 000, the pizza price is $8 and the unit variable cost $4. What is
the contribution margin ratio?
A. 40%
B. 45%
C. 50%
D. 60%
51. If break-even sales volume is $40 000 and contribution margin $7500, what is the net profit?
A. $7500
B. $32 500
C. $0
D. Insufficient information to determine
52. Would you expect the following to be high or low in a labour-intensive industry: (1) operating leverage, (2) break-even
point and (3) safety margin?
A. High, high, low
B. Low, low, high
C. Low, low, low
D. High, high, high
53.
Would you expect the following to be high or low in an automated firm: (1) level of fixed costs, (2) level of risk and (3) break-even point?

A. High, high, high
B. Low, high low
C. High, high, low
D. Low, low, high

54. Would you expect the following to be high or low in a labour-intensive firm: (1) operating leverage, (2) safety margin
and (3) profit potential?
A. Low, high, low
B. Low, low, high
C. High, low, high
D. High, low, low
55. Would you expect the following to be high or low in an automated firm: (1) safety margin, (2) operating leverage and
(3) profit potential?
A. Low, high, high
B. High, high, low
C. Low, high, low
D. High, low, low
56. Nesto sells two products: X and Y. The contribution margin ratio for X is 40 per cent and for Y is 50 per cent. If the
proportion of sales of X decreases, what will happen to the weighted average contribution margin?
A. Increase
B. Decrease
C. Remain the same
D. Changes in sales volume do not affect weighted average contribution margin
57. Which of the following will increase a company's break-even point?
A. Increasing the contribution margin per unit
B. Increasing the variable cost per unit
C. Reducing the company's total fixed costs
D. Increasing the selling price per unit
58. The contribution margin ratio is calculated as
A. total contribution margin / total sales revenue.
B. total profit / sales revenue.
C. contribution margin per unit / selling price per unit.
D. total contribution margin / total sales revenue AND contribution margin per unit / selling price per unit.
59.
For a firm that would break even at $200 000 sales and earn a profit of $30 000 at sales of $250 000, which of the following statements
is always true?

A. Fixed costs are $80 000.
B. The selling price is $2 per unit.
C. Profit at sales of $300 000 would be $80 000.
D. The contribution margin is 60 per cent of sales.

60. A firm is reorganising and reclassifying its cost structure. The firm previously classified the item ‘glue and nails' as
indirect material. The firm is considering now tracing this cost directly to products and treating ‘glue and nails' as direct
material. What is the effect on the break-even point (if any) of that change, provided all other items remain unchanged?
A. The break-even point will not change.
B. The break-even point will increase.
C. The break-even point will decrease.
D. The break-even point will change but without actual figures, it is impossible to say in what direction the change will be.
61. A firm is reorganising and reclassifying its cost structure. What is the effect on the break-even point (if any) if direct
labour costs are reduced and fixed indirect labour costs are increased, provided all other items remain unchanged?
A. The break-even point will increase.
B. The break-even point will decrease.
C. The break-even point will change but without actual figures, it is impossible to say in what direction the change will be.
D. It is not possible to determine whether the break-even point will change or will remain the same.
62. Cost volume profit analysis is a popular tool in practice. Why is it so popular?
A. It is a simple tool that can be used for long-run decision making.
B. It is a simple tool to apply and is suitable for short-run decision making.
C. It can be employed in all types of firms.
D. It is a simple tool to apply and is suitable for short-run decision making AND it can be employed in all types of firms.
63. Which of the following is the most precise definition of the operating leverage factor? The operating leverage factor
measures
A. the proportion of fixed costs in a firm's cost structure.
B. the proportion of variable costs in a firm's cost structure.
C. the effect that an increase (decrease) in sales volume will have on profit.
D. the proportion of fixed costs in a firm's cost structure AND the proportion of variable costs in a firm's cost structure.
64. A firm has an operating leverage factor of 4. This means that
A. if sales revenue increased by 2 per cent, profit would increase by 4 per cent.
B. if sales revenue increased by 2 per cent, profit would increase by 8 per cent.
C. if sales revenue increased by 2 per cent, profit would increase by 2 per cent.
D. profit would increase by 4 times the dollar increase in sales revenue.
65. The operating leverage factor is calculated as
A. total profit / sales revenue.
B. contribution margin per unit / selling price per unit.
C. contribution margin / net profit.
D. contribution margin / total fixed costs.
66. The margin of safety is the difference between
A. contribution margin and net profit before tax.
B. budgeted contribution margin and actual contribution margin.
C. budgeted sales revenue and actual sales revenue.
D. budgeted sales revenue and break-even sales revenue.

67.
A firm produces products A and B. The following data is available:
Selling price per unit is $20 A and $25 B
Variable costs per unit is $11 A and $18 B
Sixty percent of sales in units are expected to be product A. Fixed costs are expected to be $82 000. Calculate the break-even level of
sales in units.

A. 2460 A; 1312 B
B. 3000 A; 2000 B
C. 6000 A; 4000 B
D. 18 000 A; 14 000 B

68. Cost volume profit applied to the service industry.
A hotel has 10 000 room nights available per annum, charges $50 per room per night, pays fixed costs of $150 000 per
annum and variable costs of $16 for each night a room is occupied. If the price per room per night is increased by 5 per
cent, the break-even occupancy rate as a percentage (rounded) is
A. 38%.
B. 41%.
C. 44%.
D. 50%.
69.
Cost volume profit applied to the service industry
A nursing home has the following annual budget:
Calculate the budgeted contribution margin ratio.

A. 3%
B. 22%
C. 25%
D. 33.33%

70.

Calculate the budgeted break-even point in inpatient days.

A. 7333 days
B. 22 000 days
C. 25 000 days

71.
Which of the following statements is correct if fixed administration costs were increased by $50 000 and all other matters remained the
same?

A. The break-even point in inpatient days would increase.
B. The contribution would decrease.
C. The net profit would increase.
D. There would be no change in break-even point.

72.
A firm makes and sells three standard products in a specific product mix. All three products are made using the same production
facilities. The following budgeted data for the coming year is available.

Total annual fixed costs $348 000
Tax rate 40%
The break-even sales units for products 1, 2 and 3 are

A. 1200; 3000; 1800.
B. 3600; 9000; 5400.
C. 2400; 6000; 3600.
D. Can only determine the total break-even point, not the units of each product

73.

Tax rate 40%
What sales revenue would be required for each of the three products to earn a profit of $139 200 after tax?

A. $400 000; $600 000; $480 000
B. $296 000; $740 000; $444 000
C. $200 000; $300 000; $240 000
D. $800 000; $1 200 000; $960 000

74.

Tax rate 40%
Calculate the margin of safety for the firm.

A. $1 776 000
B. $1 664 000
C. $1 332 000

75. Cost volume profit analysis is based on the separation of fixed and variable costs. The analysis can be stated as an
equation as follows: P = a(b – c) – d. In this statement of the equation, P is the profit, and
A.
b is the price per unit; c is the variable cost per unit; a is the number of units produced; d is the fixed cost.
B.
b is the number of units produced; c is the fixed cost; a is the price per unit; d is the variable cost per unit.
C.
b is the fixed cost; c is the number of units produced; a is the variable cost per unit; d is the price per unit.
D.
All of the given answers are incorrect because they all refer to the number of units produced. In fact, profit is determined according to
the number of units sold.
76. Cost volume profit (CVP) analysis is based on a number of limiting assumptions. Which of the following is not one of
the assumptions of the CVP model?
A. Production units equal sales units over the period.
B. If the firm has a product mix, the mix remains constant.
C. Cost behaviour is linear over the relevant range.
D. CVP analysis only applies to a single-product firm.

77. Which of the following statements is most correct with respect to the assumptions of the cost volume profit model?
A. The assumptions of the model are realistic.
B. The assumptions of the model are unrealistic, and therefore the model has little usefulness.
C. It is not possible to state whether the assumptions of the model are realistic or unrealistic.
D. The assumptions of the model are unrealistic, but the model has great usefulness in certain circumstances, as
evidenced by its use in practice.
78. Which of the following statements about the cost-volume-profit graph is false?
A. It can be used to identify both profit areas and loss areas.
B. It shows the relevant range of total revenue.
C. It cannot be used to make managerial decisions involving step-wise costs.
D. It can be used to identify break-even points.
79.
Chelonia Ltd manufactures small robot toys. It plans to introduce a new product, Speedie the robot tortoise. The following activity cost
information is available:

It is expected that each unit of Speedie will sell for $23. The direct material cost for unit is $10. What is the contribution margin per
units?
(For simplicity, assume that you can have partial moves and partial batches – that is, no need to round up the number of batches and
the number of moves.)

A. $21
B. $13
C. $11
D. $4

80.

It is expected that each unit of Speedie will sell for $23. The direct material cost for unit is $10. What is the break-even point in units?

A. 518 units
B. 1000 units
C. 1250 units
D. 2850 units

81.

It is expected that each unit of Speedie will sell for $23. The direct material cost for unit is $10. Assuming a tax rate of 40%, how many
units of Speedie must Chelonia Ltd produce and sell to make an after-tax profit of $12 000?

A. 1000 units
B. 1818 units
C. 4250 units
D. 6250 units

82. Chelonia Ltd manufactures small robot toys. It plans to introduce a new product, Spunkie, which is a solar-powered
robot jellyfish. Initially, Chelonia Ltd plans to sell each unit of Spunkie for $95, with an expectation that 2500 units can be
sold. The variable cost per unit is $30. The management accountant at Chelonia Ltd is exploring the idea of making some
modification to Spunkie which will cost $2 per unit. This modification can allow them to increase the price to $100. This
however will lower the demand to 2000 units. Should Chelonia Ltd reduce the price of Spunkie?
A. Yes, as the modified model will increase per unit contribution margin by $3.
B. Yes, as the modified model will increase both the sales revenue and the contribution margin.
C. No, while the modified model will increase the contribution margin per unit, the lower sales volume results in a net
decrease in profit.
D. No, while the modified model will increase sales revenue, the lower contribution margin per unit will result in lower
overall net profit.
83. Chelonia Ltd manufactures small robot toys. It plans to introduce two products, Speedie and Spunkie. It is anticipated
that the product mix will be 40% Speedie and 60% Spunkie. One unit of Speedie will be sold for $100, with variable cost
equals $40. For a unit of Spunkie, the selling price will be $120 and the variable cost is $70. The fixed cost for producing
the two products is $108 000. What is the break even point?
A. Speedie: 1200 units; Spunkie: 800 units
B. Speedie: 800 units, Spunkie: 1200 units
C. Speedie: 1800 units; Spunkie: 2160 units
D. Speedie: 2160 units, Spunkie: 1800 units
the two products is $108 000. The company plans to include a safety margin of $20 000 before tax. Assuming a tax rate of
30%, what should be the budgeted sales?
85. In general, an increase in fixed cost while the contribution margin remains unchanged will
A. increase the break even point.
B. decrease the break even point, but only if the safety margin is positive.
C. either increase or decrease the break even point, depending on operation leverage.
D. have no impact on break even point.
86. Which of the following statements about the safety margin is correct?
i. All else being equal, the safety margin is higher when the break even point is lower.
ii The safety margin depends on the budgeted revenue
iii The safety margin is unaffected by fixed cost.
A. i and ii
B. i and iii
C. ii and iii
D. All three statements are correct

robot jellyfish. The break even point for Spunkie is 1500 units at $100 per unit. Assuming that the safety margin is $2000,
what are the budgeted sales (in units)?
A. 1540 units
B. 1530 units
C. 1520 units
D. 1500 units
88. The break-even point in units can be seen on a CVP graph at the intersection of
A. the fixed cost line and the total revenue line.
B. the total revenue line and the total cost line.
C. the fixed cost line and the total cost line.
D. the total revenue line and the profit/loss line.
89. On a CVP graph the vertical distance between the total revenue and total costs lines represents the
A. sales volume.
B. fixed costs.
C. variable costs.
D. profit or loss.
90.
If a firm has $482 500 in fixed costs, a unit contribution margin of $45 and targeted sales volume of 12 500 units, the target net profit
would be

A. 1737.
B. 13 402.
C. 80 000.
D. 10 722.

91.
If a firm has $482 500 in fixed costs, a target net profit of $80000 and targeted sales volume of 12 500 units, the unit contribution
margin would be

A. 6.03.
B. 6.40.
C. 38.60.
D. 45.00.

92. When management runs several CVP analyses with different combinations of estimates this is known as
A. variation analysis.
B. sensitivity analysis.
C. advanced CVP analysis.
D. goal-seek analysis.

93. Which of the following approaches enables management to apply specific changes in assumptions and data and then
to examine the effect of those changes on the output?
A. Traditional CVP analysis
B. Goal-seek approach
C. What-if analysis
D. Sensitivity analysis
94. i. Explain how cost volume profit (CVP) analysis can be used by management.
ii. One of the assumptions underlying CVP analysis is a constant sales mix over the relevant range of activity. What are
the other assumptions underlying CVP analysis?
iii. The Bygon Company Ltd makes major household appliances such as refrigerators, stoves and dishwashers. Sales are
heavily dependent upon the number of housing starts and the level of disposable income. Next year the number of
housing starts in Victoria is expected to be the same as this year; however, about two-thirds of these starts will be for
rental units compared to a historical average of one-third. The remaining housing starts will be for single-family homes
and up market units. Bygon generally makes two levels of each product: the economy model (fully functional, but with few
special features) and the prestige model (with the most popular special features). Bygon assumes a product mix of 40 per
cent economy and 60 per cent prestige. Describe how the change in the percentage of rental units in housing starts could
create a problem with the stable product mix assumption.

95. i. Explain how the traditional profit and loss statement differs from the format used in cost volume profit (CVP)
analysis.
ii. One of the assumptions underlying CVP analysis is a constant variable cost per unit and fixed costs in total over the
relevant range of activity. What are the other assumptions underlying CVP analysis?
iii. The Beetle Company Ltd is experiencing considerable growth and now is able to consider buying raw materials in far
larger quantities than a few years ago. For example, one of their primary raw materials may be obtained in bulk purchase
lots consisting of three railway wagons as a purchasing unit. The advantage of purchasing in this quantity is that the per-
litre cost of this raw material is much cheaper than obtained through purchases of single semitrailer truckloads. In
planning for next year, the lower end of possible levels of activity is sufficiently small that the purchase of single semitrailer
truckloads would be appropriate. However, at the higher end of the possible levels of activity, purchase in three railway
wagons units would be preferable. How could the situation described above be reflected in the CVP analysis? Which of
the lines (total revenue, total costs, total fixed costs) would have to be changed and how?

96. i. ‘Cost driver' is a widely used term in activity-based costing. What is a cost driver? What is the cost driver in
conventional cost volume profit (CVP) analysis? How is the cost driver measured in conventional CVP analysis?
ii. In activity-based costing, costs are classified into unit level, batch level, product level and facility level. How are these
categories typically handled in CVP analysis, where there are only two categories available: fixed or variable?
iii. In an environment where activity-based costing is necessary and appropriate, is the relevance of conventional CVP
analysis enhanced or diminished? Explain.
iv. Explain the additional limiting assumption of using CVP analysis under activity-based costing.

97. i. Define operating leverage.
ii. The firm is planning to increase the selling price. If sales volume in units does not change, what will happen to the
operating leverage factor? (Assume the firm pays no income taxes.) Explain.
iii. The firm is planning to increase fixed manufacturing costs and decrease variable manufacturing costs per unit. At the
present volume of production, the total manufacturing costs will be unchanged. What will this change do to the operating
leverage factor? (Assume no income taxes.) Explain.

98. Describe and illustrate with an example, the steps required to construct a cost volume profit (CVP) graph.

99. Management would prefer a smaller safety margin to a larger one, as the smaller margin puts the company in a better
financial position.
True False
100. Although the cost structure of a firm considers the proportions of fixed and variable costs, these structures will differ
depending on the firm itself and the particular industry.
True False
101. The cost volume profit model is a simple model to use because tax is a factor that does not have to be considered.
True False

102. When calculating the breakeven point with a company that has multiple products, there is no real need to know the
proportion of the sales for each product.
True False
103. When doing cost volume profit analysis, the starting point is always to analyse the cost behaviours in relation to
activity levels.
True False
104. If a firm has a net profit of $50 000, a revenue of $520 000 and variable costs of $300 000, the operating leverage
factor would be 5.5.
True False
105. When calculating a breakeven point with activity-based costing, all costs from unit, batch, product and facility levels
are used in the formula.
True False
106. One of the biggest criticisms of cost volume profit (CVP) analysis is that it is merely a simplified model that needs to
be used with a lot of caution.
True False
107. ‘What-if' analysis allows financial models to be manipulated in terms of changes to assumptions and data, to
determine the changes in outputs.
True False
108. To calculate the breakeven point, the equation (SP-VC)X – FC = 0 where SP = selling price per unit, VC = variable
cost per unit, FC = fixed costs and X = the units at breakeven, can be used.
True False
109. When fixed costs are divided by the contribution margin ratio the result will provide management with the break-even
point in sales dollars.
True False
110. When interpreting the cost volume profit graph, the break-even point is where the total revenue line intercepts the
fixed cost line.
True False

111.
If a firm has $4 00 000 in fixed costs, a unit contribution margin of $60 and a target net profit of $80 000, the target sales volume to
achieve this profit would be 8000 units.

True False

Chapter 18 Testbank Key

1. The concept of cost volume profit analysis is based on classifying costs as
A. fixed and variable costs.
B. variable product and period costs.
C. product controllable and uncontrollable costs.
D. fixed and variable costs AND variable product and period costs.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 18.01 Calculate the break-even point in sales units using the CVP equation
2. The break-even point is that level of activity where
A. total revenue equals total cost.
B. total revenue equals fixed cost.
C. total revenue equals variable cost.
D. total revenue equals product cost.
AACSB: Reflective
Difficulty: Easy
3. The contribution margin per unit is calculated as the difference between
A. sales revenue per unit and fixed cost per unit.
B. sales revenue per unit and variable cost per unit.
C. sales revenue per unit and product cost per unit.
D. fixed cost per unit and variable cost per unit.
AACSB: Reflective
Difficulty: Easy
4. The break-even point is calculated by
A. sales volume  unit selling price / sales volume  unit variable cost.
B. variable costs / total revenue.
C. fixed costs / unit contribution margin.
D. variable costs / unit contribution margin.
AACSB: Reflective
Difficulty: Easy
5. Ribco Company Ltd makes and sells only one product. The unit contribution margin is $6, and the break-even point in
unit sales is 24 000. What are the company's fixed expenses?
A. $400 000
B. $14 400
C. $40 000
D. $144 000
AACSB: Analytical
Difficulty: Easy
6. The contribution margin ratio is (all on a per unit basis)
A. the difference between the selling price and the variable cost.
B. variable cost divided by selling price.
C. contribution margin divided by selling price.
D. contribution margin divided by fixed cost.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 18.02 Calculate the contribution margin ratio, and use it to find the break-even point in sales dollars
7. The break-even point in sales dollars can be calculated by dividing
A. fixed expenses by the unit contribution margin.
B. variable expenses by the unit contribution margin.
C. fixed expenses by the contribution margin ratio.
D. variable expenses by the contribution margin ratio.
AACSB: Reflective
Difficulty: Easy
8.
The firm's fixed costs are $60 000, variable cost per unit is $15 and selling price per unit is $20. The contribution margin per unit is

A. $5.
B. $15.
C. $20.
D. $35.

AACSB: Analytical
Difficulty: Easy
9. The firm's fixed costs are $60 000, variable cost per unit is $15 and selling price per unit is $20. The break-even point in
units is
A. 1715.
B. 3000.
C. 4000.
D. 12 000.
AACSB: Analytical
Difficulty: Easy
10. The firm's fixed costs are $60 000, variable cost per unit is $15 and selling price per unit is $20. The break-even point
in sales dollars is
A. $80 000.
B. $120 000.
C. $240 000.
D. $300 000.
AACSB: Analytical
Difficulty: Easy
11. The firm's fixed costs are $60 000, variable cost per unit is $15 and selling price per unit is $20. The contribution
margin percentage is
A. 2.5%.
B. 25%.
C. 33%.
D. 400%.
AACSB: Analytical
Difficulty: Easy
12. Epex Pty Ltd makes a single product. Annual fixed expenses are $48 000 and the contribution margin ratio is 30 per
cent. What volume in sales dollars is necessary for Epex to achieve a target profit of $15 000?
A. $63 000
B. $90 000
C. $160 000
D. $210 000
AACSB: Analytical
Difficulty: Easy
Learning Objective: 18.04 Use the break-even formula to determine the sales units or sales revenue required to achieve a target net profit
13. If the contribution margin is $10, the selling price per unit is $25 and the fixed costs are $45 000, what is the number
of units that must be sold to break even?
A. 4500
B. 4000
C. 3000
D. 1800
AACSB: Analytical
Difficulty: Easy
14. If the contribution margin is $10, the selling price per unit is $25 and the fixed costs are $45 000, to earn a targeted
net profit of $50 000 the total dollar value of sales must be at least
A. $10 000.
B. $112 500.
C. $122 500.
D. $237 500.
AACSB: Analytical
Difficulty: Easy
15. The difference between the budgeted sales revenue and the break-even sales revenue is the
A. unit contribution margin.
B. contribution margin percentage.
C. safety margin.
D. operating leverage.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 18.05 Apply CVP analysis to determine the effect on profits of changes in fixed costs, variable costs, sales prices and sales volume
16. Suppose fixed expenses were to increase by 5.9 per cent. How would this affect the break-even point?
A. The break-even point in units would rise 5.9 per cent.
B. The break-even point in dollars would rise 11.8 per cent.
C. The break-even point in dollars would rise by more than 5.9 per cent.
D. The break-even point in dollars would fall by more than 5.9 per cent.
AACSB: Reflective
Difficulty: Easy
17. Suppose variable expenses were to decrease by $3.00 per unit. What effect would this have on the cost volume profit
analysis?
A. The unit contribution margin would rise by $3.00.
B. The break-even point in units would increase.
D. The unit contribution margin would rise by $3.00 AND the break-even point in units would decrease.
AACSB: Reflective
Difficulty: Easy
18. Which of the following changes will affect the unit contribution margin?
A. Changes in fixed cost
B. Changes in variable cost per unit
C. Changes in selling price per unit
D. Both changes in variable cost per unit AND changes in selling price per unit
AACSB: Reflective
Difficulty: Easy
19. Suppose the selling price per unit increased from $5.00 to $6.00 per ticket. What effect would this have on the cost
volume profit analysis?
A. The contribution margin would increase.
B. The contribution margin would decrease.
D. The contribution margin would increase AND the break-even point in units would decrease.
AACSB: Reflective
Difficulty: Easy
20. (p. 857) Assume that selling price is greater than variable cost. Now suppose the selling price and the variable cost
per unit increase by $5.00. What effect would these changes have on the contribution margin in dollars and on the
contribution margin ratio?

Dollar contribution margin Contribution margin ratio

A.
Increase Increase
B.
Decrease Decrease
C.
No change No change
D.
No change Decrease
AACSB: Reflective
Difficulty: Medium
21. The total contribution margin is calculated as the difference between
A. sales price and variable cost per unit.
B. sales price and fixed cost per unit.
C. total revenue and total variable cost.
D. total revenue and total cost.
AACSB: Reflective
Difficulty: Easy
22. Cost volume profit analysis is based on certain general assumptions. Which of the following statements about these
assumptions is/are true?
A. The price of the product will remain constant as volume varies within the relevant range.
B. Expenses can be categorised as fixed, variable or semivariable.
C. Total fixed costs remain constant and unit variable cost remains unchanged as activity varies.
AACSB: Reflective
Difficulty: Medium
Learning Objective: 18.08 Describe the limitations and potential uses of CVP analysis in practice
23. Under an activity-based costing system, the break-even point in units is calculated by
A. total non-volume activity cost / selling price per unit – fixed cost per unit.
B. total non-volume activity cost / selling price per unit – unit level cost per unit.
C. total non-volume activity cost / contribution margin per unit.
D. total fixed costs / contribution margin per unit.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 18.09 Use activity-based approaches within CVP analysis and understand the limiting assumptions implicit in this analysis
24. Which of the following are advantages of an activity-based costing approach to cost volume profit (CVP) analysis as
compared to a CVP analysis based on traditional product costing?
A. Unit variable costs are recognised more clearly.
B. Fixed costs are viewed as fixed only with respect to changes in sales and production volume, but not as fixed with
respect to changes in other cost drivers such as number of set-ups and number of material moves.
C. The assumption in traditional CVP analysis that sales and production volumes are equal can be relaxed.
D. Unit variable costs are recognised more clearly AND fixed costs are viewed as fixed only with respect to changes in
sales and production volume, but not with respect to changes in other cost drivers such as number of set-ups and number
of material moves.
AACSB: Reflective
Difficulty: Medium
25. Which of the following assumptions is made when doing a cost volume profit analysis based on activity-based
costing?
A. Sales volume equals production volume.
B. As production volume changes, the number of set-ups, inspections, material moves etc. does not change.
C. The purchase price of raw materials per unit remains constant.
D. Sales volume equals production volume AND the purchase price of raw materials per unit remains constant.
AACSB: Reflective
Difficulty: Medium
26. The extent to which an organisation uses fixed costs in its cost structure is called
A. financial leverage.
B. operating leverage.
C. fixed cost leverage.
D. operating leverage AND fixed cost leverage.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 18.11 Explain the concepts of cost structure and operating leverage, and measure operating leverage
27. If total costs remain the same, the smaller the proportion of fixed costs in a firm's cost structure
A. the greater the impact on profit from a percentage change in sales volume.
B. the smaller the impact a percentage change in sales volume will have on profit.
C. the lower the contribution margin.
D. the smaller the impact a percentage change in sales volume will have on profit AND the lower the contribution margin.
AACSB: Reflective
Difficulty: Medium
28. If the operating leverage factor is known, which of the following can be determined?
A. Contribution margin ratio
B. Contribution margin in dollars
C. Break-even point in sales dollars
D. Percentage change in profit for a given percentage change in sales
AACSB: Reflective
Difficulty: Medium
29. Alclear Pool & Spa presently provides a weekly maintenance service to 150 homes. Variable costs amount to
approximately $12 per week for labour, mileage, chemicals and other supplies. Fixed costs are approximately $13 000 per
quarter (13 weeks). Customers pay $270 per quarter for the weekly service. All contracts are written for one quarter (13
weeks).
Determine the number of customers (rounded) to break even.
A. 95
B. 103
C. 114
D. 197
AACSB: Analytic
Difficulty: Medium
30. Alclear Pool & Spa presently provides a weekly maintenance service to 150 homes. Fixed costs are approximately
$13 000 per quarter (13 weeks). Customers pay $270 per quarter for the weekly service. All contracts are written for one
quarter (13 weeks). Now assume the contracts with customers are restructured such that the price per quarter is $300
and the contribution margin percentage is 57 per cent. Assume the tax rate is 25 per cent.
Determine the sales dollars (to the nearest $100) necessary to obtain an after-tax profit of $9600 per quarter.
A. $39 600
B. $45 300
C. $52 900
D. $90 200
AACSB: Analytical
Difficulty: Medium
Learning Objective: 18.07 Include income taxes in CVP analysis
31.

Sixty per cent of the sales in units are Plain and annual fixed expenses are $45 000.
Determine the weighted average unit contribution margin.

A. $17.00
B. $9.25
C. $9.00
D. $4.80

AACSB: Analytical
Difficulty: Easy
Learning Objective: 18.06 Calculate the break-even point and prepare a profit volume graph where there are multiple products
32.
Maxie Pty Ltd makes and sells two types of shoes: Plain and Fancy. Product data is as follows:

Determine the total number of units Maxie Pty Ltd must sell to break even.

A. 9375
B. 5000
C. 4737
D. 2647

AACSB: Analytical
Difficulty: Medium
33.

Determine the number of units of Plain and Fancy respectively that Maxie Pty Ltd must sell to break even.

A. 2000; 3000
B. 0; 5000
C. 5000; 0
D. 3000; 2000

AACSB: Analytical
Difficulty: Medium
34.

How many units of Fancy must Maxie Pty Ltd sell to earn a target profit of $31 500?

A. 3400
B. 2000
C. 7286
D. 8500

AACSB: Analytical
Difficulty: Medium
35.

How many units of Plain must Maxie Pty Ltd sell to earn an after tax profit of $18 000?

A. 4500
B. 7875
C. 3960
D. 8437

AACSB: Analytical
Difficulty: Medium
36.

The break-even point for this data is 5000 units in total. How will the calculation of the break-even point change (if at all) if the relative
percentages of the products in the mix change from 60 per cent Plain shoes to 40 per cent Fancy shoes?

A. The break-even point in total will not change. The only change will be the relative number of each of the units.
B. Neither the break-even point in total nor the relative number of each of the units to produce at break-even will change.
C. The break-even point will change because the calculation above assumes a constant mix, namely 60 per cent to 40 per
cent.
D. The break-even point will be higher.

AACSB: Reflective
Difficulty: Medium
37.
Econ Pty Ltd produced and sold 45 000 units of a single product last year. Data concerning the year's profit and loss statement are as
follows:

What was Econ's total contribution margin for the year?

A. $495 000
B. $540 000
C. $724 500
D. $810 000

AACSB: Analytical
Difficulty: Easy
38.
follows:
What was Econ's break-even point (rounded) in unit sales?

A. 36 000
B. 24 000
C. 25 411
D. 26 832

AACSB: Analytical
Difficulty: Medium
39.
follows:

What was Econ's break-even point in dollar sales?

A. $720 000
B. $762 330
C. $1 080 000
D. $1 134 000

AACSB: Analytical
Difficulty: Medium
40.
follows:

What was Econ's operating leverage?

A. 4
B. 5
C. 6
D. 7

AACSB: Analytical
Difficulty: Medium
41.
follows:

Assuming sales revenue increases by 15 per cent, what will be the percentage increase in profit before income tax?

A. 15%
B. 45%
C. 60%
D. 75%

AACSB: Analytical
Difficulty: Hard
42.
follows:

Assuming all cost relationships will remain constant for the coming year, how many units must be sold for the company to earn an
after-tax profit of $180 000 if the income tax rate is 40 per cent?

A. 45 000
B. 47 500
C. 61 000
D. 70 000

AACSB: Analytical
Difficulty: Hard
43. Under activity-based costing systems, break-even point in units treats which costs as included in the numerator?
i. Batch costs
ii. Product costs
iii. Faculty level costs
A. i and ii
B. i and iii
C. ii and iii
AACSB: Reflective
Difficulty: Easy
44. The firm uses activity-based costing and has the following cost structure: selling price $50, batch cost $20 000, unit
level costs $30 per unit, facility costs $120 000 and product costs $60 000. What is the break-even point in units?
A. 6000
B. 7000
C. 9000
D.
10 000
AACSB: Reflective
Difficulty: Easy
45. Cost volume profit analysis, including customer-related costs, must incorporate which of the following costs:
i. market level costs
ii. customer level costs
iii. order level costs
iv. batch level costs
A. i and ii
B. ii and iii
C. i, ii and iii
AACSB: Reflective
Difficulty: Easy
46. Which of the following statements applies to cost volume profit and sensitivity analysis?
i. Only one variable is changed.
ii. All variables are changed.
iii. One or more variables are changed.
iv. Only one set of variables need be assessed.
A. i
B. ii
C. iii
D. iv
AACSB: Reflective
Difficulty: Easy
Learning Objective: 18.10 Explain how financial planning models can be used for sensitivity analysis and to develop more sophisticated profit models
47.
‘Goal seek' analysis provides for which of the following?
i. An output for a given set of inputs
ii. Required inputs for a given output
iii. A range of outputs for a range of inputs

A. i
B. ii
C. iii

AACSB: Reflective
Difficulty: Easy
48. Which of the following do limitations of cost volume profit include?
i. Not all costs can be classified as fixed or variable.
ii. Revenue changes may not be linear.
iii. Sales volume is the only cost driver.
iv. Inventory levels do not change.
A. i and ii
B. i and iii
C. i, ii and ii
AACSB: Reflective
Difficulty: Easy
49. Which of the following are assumptions of cost volume profit analysis?
i. Sales mix is constant.
ii. External factors do not change.
iii. Fixed costs change with sales volume.
iv. Variable costs are constant per unit of sales.
A. i, ii and iii
B. ii, iii and iv
C. i, ii and iv
AACSB: Reflective
Difficulty: Easy
50. Your local pizza parlour has annual fixed costs of $20 000, the pizza price is $8 and the unit variable cost $4. What is
the contribution margin ratio?
A. 40%
B. 45%
C. 50%
D. 60%
AACSB: Analytical
Difficulty: Easy
51. If break-even sales volume is $40 000 and contribution margin $7500, what is the net profit?
A. $7500
B. $32 500
C. $0
D. Insufficient information to determine
AACSB: Reflective
Difficulty: Easy
52. Would you expect the following to be high or low in a labour-intensive industry: (1) operating leverage, (2) break-even
point and (3) safety margin?
A. High, high, low
B. Low, low, high
C. Low, low, low
D. High, high, high
AACSB: Reflective
Difficulty: Medium
53.
Would you expect the following to be high or low in an automated firm: (1) level of fixed costs, (2) level of risk and (3) break-even point?

A. High, high, high
B. Low, high low
C. High, high, low
D. Low, low, high

AACSB: Reflective
Difficulty: Medium
54. Would you expect the following to be high or low in a labour-intensive firm: (1) operating leverage, (2) safety margin
and (3) profit potential?
A. Low, high, low
B. Low, low, high
C. High, low, high
D. High, low, low
AACSB: Reflective
Difficulty: Medium
55. Would you expect the following to be high or low in an automated firm: (1) safety margin, (2) operating leverage and
(3) profit potential?
A. Low, high, high
B. High, high, low
C. Low, high, low
D. High, low, low
AACSB: Reflective
Difficulty: Medium
56. Nesto sells two products: X and Y. The contribution margin ratio for X is 40 per cent and for Y is 50 per cent. If the
proportion of sales of X decreases, what will happen to the weighted average contribution margin?
A. Increase
B. Decrease
C. Remain the same
D. Changes in sales volume do not affect weighted average contribution margin
AACSB: Reflective
Difficulty: Easy
57. Which of the following will increase a company's break-even point?
A. Increasing the contribution margin per unit
B. Increasing the variable cost per unit
C. Reducing the company's total fixed costs
D. Increasing the selling price per unit
AACSB: Reflective
Difficulty: Easy
58. The contribution margin ratio is calculated as
A. total contribution margin / total sales revenue.
B. total profit / sales revenue.
C. contribution margin per unit / selling price per unit.
D. total contribution margin / total sales revenue AND contribution margin per unit / selling price per unit.
AACSB: Reflective
Difficulty: Easy
59.
For a firm that would break even at $200 000 sales and earn a profit of $30 000 at sales of $250 000, which of the following statements
is always true?

A. Fixed costs are $80 000.
B. The selling price is $2 per unit.
C. Profit at sales of $300 000 would be $80 000.
D. The contribution margin is 60 per cent of sales.

AACSB: Analytical
AACSB: Reflective
Difficulty: Medium
60. A firm is reorganising and reclassifying its cost structure. The firm previously classified the item ‘glue and nails' as
indirect material. The firm is considering now tracing this cost directly to products and treating ‘glue and nails' as direct
material. What is the effect on the break-even point (if any) of that change, provided all other items remain unchanged?
A. The break-even point will not change.
B. The break-even point will increase.
C. The break-even point will decrease.
D. The break-even point will change but without actual figures, it is impossible to say in what direction the change will be.
AACSB: Reflective
Difficulty: Medium
61. A firm is reorganising and reclassifying its cost structure. What is the effect on the break-even point (if any) if direct
labour costs are reduced and fixed indirect labour costs are increased, provided all other items remain unchanged?
A. The break-even point will increase.
B. The break-even point will decrease.
C. The break-even point will change but without actual figures, it is impossible to say in what direction the change will be.
D. It is not possible to determine whether the break-even point will change or will remain the same.
AACSB: Reflective
Difficulty: Medium
62. Cost volume profit analysis is a popular tool in practice. Why is it so popular?
A. It is a simple tool that can be used for long-run decision making.
B. It is a simple tool to apply and is suitable for short-run decision making.
C. It can be employed in all types of firms.
D. It is a simple tool to apply and is suitable for short-run decision making AND it can be employed in all types of firms.
AACSB: Reflective
Difficulty: Easy
63. Which of the following is the most precise definition of the operating leverage factor? The operating leverage factor
measures
A. the proportion of fixed costs in a firm's cost structure.
B. the proportion of variable costs in a firm's cost structure.
C. the effect that an increase (decrease) in sales volume will have on profit.
D. the proportion of fixed costs in a firm's cost structure AND the proportion of variable costs in a firm's cost structure.
AACSB: Reflective
Difficulty: Easy
64. A firm has an operating leverage factor of 4. This means that
A. if sales revenue increased by 2 per cent, profit would increase by 4 per cent.
B. if sales revenue increased by 2 per cent, profit would increase by 8 per cent.
C. if sales revenue increased by 2 per cent, profit would increase by 2 per cent.
D. profit would increase by 4 times the dollar increase in sales revenue.
AACSB: Analytical
Difficulty: Easy
65. The operating leverage factor is calculated as
A. total profit / sales revenue.
B. contribution margin per unit / selling price per unit.
C. contribution margin / net profit.
D. contribution margin / total fixed costs.
AACSB: Reflective
Difficulty: Easy
66. The margin of safety is the difference between
A. contribution margin and net profit before tax.
B. budgeted contribution margin and actual contribution margin.
C. budgeted sales revenue and actual sales revenue.
D. budgeted sales revenue and break-even sales revenue.
AACSB: Reflective
Difficulty: Easy
67.
A firm produces products A and B. The following data is available:
Selling price per unit is $20 A and $25 B
Variable costs per unit is $11 A and $18 B
Sixty percent of sales in units are expected to be product A. Fixed costs are expected to be $82 000. Calculate the break-even level of
sales in units.

A. 2460 A; 1312 B
B. 3000 A; 2000 B
C. 6000 A; 4000 B
D. 18 000 A; 14 000 B

AACSB: Analytical
Difficulty: Medium
68. Cost volume profit applied to the service industry.
A hotel has 10 000 room nights available per annum, charges $50 per room per night, pays fixed costs of $150 000 per
annum and variable costs of $16 for each night a room is occupied. If the price per room per night is increased by 5 per
cent, the break-even occupancy rate as a percentage (rounded) is
A. 38%.
B. 41%.
C. 44%.
D. 50%.
AACSB: Analytical
Difficulty: Medium
69.
Calculate the budgeted contribution margin ratio.

A. 3%
B. 22%
C. 25%
D. 33.33%

AACSB: Analytical
Difficulty: Medium
70.

Calculate the budgeted break-even point in inpatient days.

A. 7333 days
B. 22 000 days
C. 25 000 days

AACSB: Analytical
Difficulty: Medium
71.
Which of the following statements is correct if fixed administration costs were increased by $50 000 and all other matters remained the
same?

A. The break-even point in inpatient days would increase.
B. The contribution would decrease.
C. The net profit would increase.
D. There would be no change in break-even point.

AACSB: Analytical
Difficulty: Easy
72.

Tax rate 40%
The break-even sales units for products 1, 2 and 3 are

A. 1200; 3000; 1800.
B. 3600; 9000; 5400.
C. 2400; 6000; 3600.
D. Can only determine the total break-even point, not the units of each product

AACSB: Analytical
Difficulty: Medium
73.

Tax rate 40%
What sales revenue would be required for each of the three products to earn a profit of $139 200 after tax?

A. $400 000; $600 000; $480 000
B. $296 000; $740 000; $444 000
C. $200 000; $300 000; $240 000
D. $800 000; $1 200 000; $960 000

AACSB: Analytical
Difficulty: Hard
74.

Tax rate 40%
Calculate the margin of safety for the firm.

A. $1 776 000
B. $1 664 000
C. $1 332 000

AACSB: Analytical
Difficulty: Hard
75. Cost volume profit analysis is based on the separation of fixed and variable costs. The analysis can be stated as an
equation as follows: P = a(b – c) – d. In this statement of the equation, P is the profit, and
A.
b is the price per unit; c is the variable cost per unit; a is the number of units produced; d is the fixed cost.
B.
b is the number of units produced; c is the fixed cost; a is the price per unit; d is the variable cost per unit.
C.
b is the fixed cost; c is the number of units produced; a is the variable cost per unit; d is the price per unit.
D.
All of the given answers are incorrect because they all refer to the number of units produced. In fact, profit is determined according to
the number of units sold.
AACSB: Reflective
Difficulty: Easy
76. Cost volume profit (CVP) analysis is based on a number of limiting assumptions. Which of the following is not one of
the assumptions of the CVP model?
A. Production units equal sales units over the period.
B. If the firm has a product mix, the mix remains constant.
C. Cost behaviour is linear over the relevant range.
D. CVP analysis only applies to a single-product firm.
AACSB: Reflective
Difficulty: Easy
77. Which of the following statements is most correct with respect to the assumptions of the cost volume profit model?
A. The assumptions of the model are realistic.
B. The assumptions of the model are unrealistic, and therefore the model has little usefulness.
C. It is not possible to state whether the assumptions of the model are realistic or unrealistic.
D. The assumptions of the model are unrealistic, but the model has great usefulness in certain circumstances, as
evidenced by its use in practice.
AACSB: Reflective
Difficulty: Easy
78. Which of the following statements about the cost-volume-profit graph is false?
A. It can be used to identify both profit areas and loss areas.
B. It shows the relevant range of total revenue.
C. It cannot be used to make managerial decisions involving step-wise costs.
D. It can be used to identify break-even points.
AACSB: Reflective
Difficulty: Easy
Learning Objective: 18.03 Prepare a cost volume profit graph and a profit volume graph, and explain how they may be used
79.

It is expected that each unit of Speedie will sell for $23. The direct material cost for unit is $10. What is the contribution margin per
units?

A. $21
B. $13
C. $11
D. $4

AACSB: Analytical
Difficulty: Easy
80.

It is expected that each unit of Speedie will sell for $23. The direct material cost for unit is $10. What is the break-even point in units?

A. 518 units
B. 1000 units
C. 1250 units
D. 2850 units

AACSB: Analytical
Difficulty: Hard
81.

It is expected that each unit of Speedie will sell for $23. The direct material cost for unit is $10. Assuming a tax rate of 40%, how many
units of Speedie must Chelonia Ltd produce and sell to make an after-tax profit of $12 000?

A. 1000 units
B. 1818 units
C. 4250 units
D. 6250 units

AACSB: Analytical
Difficulty: Hard
robot jellyfish. Initially, Chelonia Ltd plans to sell each unit of Spunkie for $95, with an expectation that 2500 units can be
sold. The variable cost per unit is $30. The management accountant at Chelonia Ltd is exploring the idea of making some
modification to Spunkie which will cost $2 per unit. This modification can allow them to increase the price to $100. This
however will lower the demand to 2000 units. Should Chelonia Ltd reduce the price of Spunkie?
A. Yes, as the modified model will increase per unit contribution margin by $3.
B. Yes, as the modified model will increase both the sales revenue and the contribution margin.
C. No, while the modified model will increase the contribution margin per unit, the lower sales volume results in a net
decrease in profit.
D. No, while the modified model will increase sales revenue, the lower contribution margin per unit will result in lower
overall net profit.
AACSB: Reflective
Difficulty: Medium
the two products is $108 000. What is the break even point?
AACSB: Analytical
Difficulty: Medium
the two products is $108 000. The company plans to include a safety margin of $20 000 before tax. Assuming a tax rate of
30%, what should be the budgeted sales?
AACSB: Analytic
Difficulty: Hard
85. In general, an increase in fixed cost while the contribution margin remains unchanged will
A. increase the break even point.
B. decrease the break even point, but only if the safety margin is positive.
C. either increase or decrease the break even point, depending on operation leverage.
D. have no impact on break even point.
AACSB: Reflective
Difficulty: Easy
86. Which of the following statements about the safety margin is correct?
i. All else being equal, the safety margin is higher when the break even point is lower.
ii The safety margin depends on the budgeted revenue
iii The safety margin is unaffected by fixed cost.
A. i and ii
B. i and iii
C. ii and iii
D. All three statements are correct
AACSB: Reflective
Difficulty: Easy
robot jellyfish. The break even point for Spunkie is 1500 units at $100 per unit. Assuming that the safety margin is $2000,
what are the budgeted sales (in units)?
A. 1540 units
B. 1530 units
C. 1520 units
D. 1500 units
AACSB: Analytical
Difficulty: Easy
88. The break-even point in units can be seen on a CVP graph at the intersection of
A. the fixed cost line and the total revenue line.
B. the total revenue line and the total cost line.
C. the fixed cost line and the total cost line.
D. the total revenue line and the profit/loss line.
AACSB: Reflective
Difficulty: Easy
89. On a CVP graph the vertical distance between the total revenue and total costs lines represents the
A. sales volume.
B. fixed costs.
C. variable costs.
D. profit or loss.
AACSB: Reflective
Difficulty: Easy
90.
If a firm has $482 500 in fixed costs, a unit contribution margin of $45 and targeted sales volume of 12 500 units, the target net profit
would be

A. 1737.
B. 13 402.
C. 80 000.
D. 10 722.

AACSB: Reflective
Difficulty: Easy
91.
If a firm has $482 500 in fixed costs, a target net profit of $80000 and targeted sales volume of 12 500 units, the unit contribution
margin would be

A. 6.03.
B. 6.40.
C. 38.60.
D. 45.00.

AACSB: Reflective
Difficulty: Easy
92. When management runs several CVP analyses with different combinations of estimates this is known as
A. variation analysis.
B. sensitivity analysis.
C. advanced CVP analysis.
D. goal-seek analysis.
AACSB: Reflective
Difficulty: Easy
93. Which of the following approaches enables management to apply specific changes in assumptions and data and then
to examine the effect of those changes on the output?
A. Traditional CVP analysis
B. Goal-seek approach
C. What-if analysis
D. Sensitivity analysis
AACSB: Reflective
Difficulty: Easy
94. i. Explain how cost volume profit (CVP) analysis can be used by management.
ii. One of the assumptions underlying CVP analysis is a constant sales mix over the relevant range of activity. What are
the other assumptions underlying CVP analysis?
iii. The Bygon Company Ltd makes major household appliances such as refrigerators, stoves and dishwashers. Sales are
heavily dependent upon the number of housing starts and the level of disposable income. Next year the number of
housing starts in Victoria is expected to be the same as this year; however, about two-thirds of these starts will be for
rental units compared to a historical average of one-third. The remaining housing starts will be for single-family homes
and up market units. Bygon generally makes two levels of each product: the economy model (fully functional, but with few
special features) and the prestige model (with the most popular special features). Bygon assumes a product mix of 40 per
cent economy and 60 per cent prestige. Describe how the change in the percentage of rental units in housing starts could
create a problem with the stable product mix assumption.
i. CVP analysis can be used to perform ‘what if' analyses that allow management to estimate the effects of various
changes in operations on the profitability at various levels of sales. For example, the effects of changes in selling price,
variable costs per unit, fixed costs in total and volume of goods produced and sold may be explored by manipulating the
CVP model with different values for these items.
ii. The four additional assumptions for the CVP model are:
Cost behaviour is linear; that is, variable cost per unit is constant and fixed costs in total are constant.
The behaviour of total costs is linear. This implies that:
* costs can be categorised as fixed, variable or semivariable
* labour productivity, production technology and market conditions do not change
* there are no capacity additions during the period under consideration.
For both variable and fixed costs, sales volume is the only cost driver.
Inventories at the beginning = inventories at the end. This implies that production = sales.
iii. The shift towards more rental units and fewer single-family homes and up-market units is very likely to mean that the
demand for the economy models will increase relative to the demand for the prestige models. The rental unit generally will
be used for households with a lower income. Traditionally, renters will save costs by purchasing the cheaper model.
AACSB: Communication
AACSB: Reflective
Difficulty: Medium
95. i. Explain how the traditional profit and loss statement differs from the format used in cost volume profit (CVP)
analysis.
ii. One of the assumptions underlying CVP analysis is a constant variable cost per unit and fixed costs in total over the
relevant range of activity. What are the other assumptions underlying CVP analysis?
iii. The Beetle Company Ltd is experiencing considerable growth and now is able to consider buying raw materials in far
larger quantities than a few years ago. For example, one of their primary raw materials may be obtained in bulk purchase
lots consisting of three railway wagons as a purchasing unit. The advantage of purchasing in this quantity is that the per-
litre cost of this raw material is much cheaper than obtained through purchases of single semitrailer truckloads. In
planning for next year, the lower end of possible levels of activity is sufficiently small that the purchase of single semitrailer
truckloads would be appropriate. However, at the higher end of the possible levels of activity, purchase in three railway
wagons units would be preferable. How could the situation described above be reflected in the CVP analysis? Which of
the lines (total revenue, total costs, total fixed costs) would have to be changed and how?
i. In the traditional profit and loss statement, costs are grouped by function: manufacturing, selling and administration. In
CVP analysis, costs are grouped by behaviour: variable and fixed.
ii. The additional assumptions are:
constant selling price over the relevant range
stable product mix
equal sales and production volumes
labour productivity, production technology and market conditions do not change
there are no capacity additions during the period under consideration
there are no significant changes in the level of inventories.
iii. The total cost line will be affected. The total cost line is constructed by adding variable costs on top of the fixed costs.
For relatively low volume of activity, the slope of the total cost line should reflect the purchase costs associated with single
semitrailer truck purchases. However, at high levels of activity, the slope should reflect the purchase costs associated with
the larger, three railway wagon option. This means that the assumption of a constant variable cost per unit is not
maintained.
AACSB: Reflective
Difficulty: Medium
96. i. ‘Cost driver' is a widely used term in activity-based costing. What is a cost driver? What is the cost driver in
conventional cost volume profit (CVP) analysis? How is the cost driver measured in conventional CVP analysis?
ii. In activity-based costing, costs are classified into unit level, batch level, product level and facility level. How are these
categories typically handled in CVP analysis, where there are only two categories available: fixed or variable?
iii. In an environment where activity-based costing is necessary and appropriate, is the relevance of conventional CVP
analysis enhanced or diminished? Explain.
iv. Explain the additional limiting assumption of using CVP analysis under activity-based costing.
i. A cost driver is an activity or event that causes costs to be incurred. The cost drivers used in conventional CVP analysis
are related to production volume. This may be measured directly in terms of units produced if products are reasonably
homogeneous. Alternatively, it may be measured by using a ‘common denominator' such as direct labour hours or
machine hours to deal with diversity in the products manufactured.
ii. The first category, unit level costs, is viewed as variable with respect to production volume in conventional CVP
analysis; the other categories are not related to production volume, but these will vary with respect to particular activity
drivers. The term ‘fixed cost' is not relevant under activity-based costing systems.
iii. The relevance of conventional CVP analysis is diminished since costs can be viewed as fixed or variable only with
respect to the impact of one cost driver: units produced and sold. When costs can vary with respect to the number of
batches produced or the number of product lines that must be sustained, then the conventional CVP analysis cannot
handle these changes in a useful manner. The changes can be reflected in revised levels of activity costs to reflect
expected changes in the number of set-ups or engineering changes, etc.
iv. Under conventional CVP analysis, it is assumed that costs and profits are directly related to sales volume. However,
activity-based costing recognises a range of cost drivers, including non-volume-based drivers. Consequently, there are
few costs that are fixed in relation to their cost driver—most costs will vary in respect to particular activity drivers. The only
costs that can be regarded as ‘fixed' in the short run are facility-level costs, as they do not vary with any activity driver.
To break even under an activity-based system, therefore, the business must generate sufficient sales not just to cover
‘fixed costs', but to cover the ‘total' costs of the business. Therefore, to find break even, we must add together all facility-,
product- and batch-level costs and divide by the unit contribution margin.
AACSB: Reflective
Difficulty: Hard
97. i. Define operating leverage.
ii. The firm is planning to increase the selling price. If sales volume in units does not change, what will happen to the
operating leverage factor? (Assume the firm pays no income taxes.) Explain.
iii. The firm is planning to increase fixed manufacturing costs and decrease variable manufacturing costs per unit. At the
present volume of production, the total manufacturing costs will be unchanged. What will this change do to the operating
leverage factor? (Assume no income taxes.) Explain.
i. Operating leverage is contribution margin divided by net profit. It indicates the extent to which a firm uses fixed costs in
its cost structure.
ii. The increase in selling price with no change in units sold will increase both the contribution margin and the net profit by
the same dollar amount. The percentage change in net profit will be greater than the percentage change in contribution
margin. Consequently, the operating leverage factor will decrease.
iii. The decrease in variable costs will increase the contribution margin, but net profit will not be changed due to the
increase in fixed costs. Therefore, the operating leverage factor will increase.
AACSB: Reflective
Difficulty: Hard
98. Describe and illustrate with an example, the steps required to construct a cost volume profit (CVP) graph.
Step one: Draw the axes of the graph. Label the vertical axis in dollars and the horizontal axis in units of sales volume. (Note that in

CVP analysis, costs are assumed to be fixed or variable with respect to production volume, and production volume is assumed to be
equal to sales volume.)
Step two: Draw the fixed cost line. This is parallel to the horizontal axis, since fixed costs are assumed not to change despite changes
in sales volume.
Step three: Draw the total cost line. First, calculate total costs at any volume. For example, fixed costs $561 600 and variable costs
with a volume of 8000 units at a cost of $31.50 per unit:
Plot this point ($813 600 at 8000 units) on the graph. Second, draw the total cost line passing through point A and the intercept of the
fixed cost line on the vertical axis ($561 600). The difference between this line and the fixed cost line is equal to variable costs.
Step four: Draw the total revenue line. First, calculate total sales revenue at any convenient volume. We will choose 8000 units again.

Total revenue is $720 000 (8000  $90 per unit). Plot this point ($720 000 at 8000 units) on the graph. Second, draw the total revenue
line passing through point B and the origin.
Step five: Find the break-even point. This occurs at the intersection of the total revenue line and the total cost line.
Difficulty: Medium
99. Management would prefer a smaller safety margin to a larger one, as the smaller margin puts the company in a better
financial position.
FALSE
AACSB: Reflective
Difficulty: Easy
100. Although the cost structure of a firm considers the proportions of fixed and variable costs, these structures will differ
depending on the firm itself and the particular industry.
TRUE
AACSB: Reflective
Difficulty: Easy
101. The cost volume profit model is a simple model to use because tax is a factor that does not have to be considered.
FALSE
AACSB: Reflective
Difficulty: Easy
102. When calculating the breakeven point with a company that has multiple products, there is no real need to know the
proportion of the sales for each product.
FALSE
AACSB: Reflective
Difficulty: Easy
103. When doing cost volume profit analysis, the starting point is always to analyse the cost behaviours in relation to
activity levels.
TRUE
AACSB: Reflective
Difficulty: Easy
104. If a firm has a net profit of $50 000, a revenue of $520 000 and variable costs of $300 000, the operating leverage
factor would be 5.5.
FALSE
AACSB: Analytical
Difficulty: Easy
105. When calculating a breakeven point with activity-based costing, all costs from unit, batch, product and facility levels
are used in the formula.
TRUE
AACSB: Reflective
Difficulty: Easy
106. One of the biggest criticisms of cost volume profit (CVP) analysis is that it is merely a simplified model that needs to
be used with a lot of caution.
TRUE
AACSB: Reflective
Difficulty: Easy
107. ‘What-if' analysis allows financial models to be manipulated in terms of changes to assumptions and data, to
determine the changes in outputs.
TRUE
AACSB: Reflective
Difficulty: Easy
108. To calculate the breakeven point, the equation (SP-VC)X – FC = 0 where SP = selling price per unit, VC = variable
cost per unit, FC = fixed costs and X = the units at breakeven, can be used.
TRUE
AACSB: Reflective
Difficulty: Easy
109. When fixed costs are divided by the contribution margin ratio the result will provide management with the break-even
point in sales dollars.
TRUE
AACSB: Reflective
Difficulty: Easy
110. When interpreting the cost volume profit graph, the break-even point is where the total revenue line intercepts the
fixed cost line.
FALSE
AACSB: Reflective
Difficulty: Easy
111.
If a firm has $4 00 000 in fixed costs, a unit contribution margin of $60 and a target net profit of $80 000, the target sales volume to
achieve this profit would be 8000 units.

TRUE

AACSB: Reflective
Difficulty: Easy
Chapter 18 Testbank Summary
Category # of Questi
ons
AACSB: Analytic 2
AACSB: Analytical 37
AACSB: Communication 5
AACSB: Reflective 72
Difficulty: Easy 69
Difficulty: Hard 9
Difficulty: Medium 33
Learning Objective: 18.01 Calculate the break-even point in sales units using the CVP equation 25
Learning Objective: 18.02 Calculate the contribution margin ratio, and use it to find the break-even point in sales dollar 7
s
Learning Objective: 18.03 Prepare a cost volume profit graph and a profit volume graph, and explain how they may be 5
used
Learning Objective: 18.04 Use the break-even formula to determine the sales units or sales revenue required to achiev 6
e a target net profit
Learning Objective: 18.05 Apply CVP analysis to determine the effect on profits of changes in fixed costs, variable cost 15
s, sales prices and sales volume
Learning Objective: 18.06 Calculate the break-even point and prepare a profit volume graph where there are multiple p 10
roducts
Learning Objective: 18.07 Include income taxes in CVP analysis 8
Learning Objective: 18.08 Describe the limitations and potential uses of CVP analysis in practice 10
Learning Objective: 18.09 Use activity-based approaches within CVP analysis and understand the limiting assumption 10
s implicit in this analysis
Learning Objective: 18.10 Explain how financial planning models can be used for sensitivity analysis and to develop m 5
ore sophisticated profit models
Learning Objective: 18.11 Explain the concepts of cost structure and operating leverage, and measure operating lever 15
age

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Chapter 18 Testbank

Dollar contribution margin Contribution margin ratio

Dollar contribution margin Contribution margin ratio

Step one: Draw the axes of the graph. Label the vertical axis in dollars and the horizontal axis in units of sales volume. (Note that in

Step four: Draw the total revenue line. First, calculate total sales revenue at any convenient volume. We will choose 8000 units again.

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