CVP / BREAK EVEN ANALYSIS

PROBLEM 1 TRUE-FALSE STATEMENTS

1. Statement 1 An activity index identifies the activity that has a causal relationship with a particular cost.
Statement 2 A variable cost remains constant per unit at various levels of activity.
a. Both statements are TRUE
b. Both statements are FALSE
c. 1st statement is TRUE; 2nd statement is FALSE.
d. 1st statement is FALSE; 2nd statement is TRUE

2. Statement 1 A fixed cost remains constant in total and on a per unit basis at various levels of activity.
Statement 2 If volume increases, all costs will increase.
a. Both statements are TRUE
b. Both statements are FALSE
c. 1st statement is TRUE; 2nd statement is FALSE.
d. 1st statement is FALSE; 2nd statement is TRUE

3. Statement 1 If the activity index decreases, total variable costs will decrease proportionately.
Statement 2 Changes in the level of activity will cause unit variable and unit fixed costs to change in
opposite directions.
a. Both statements are TRUE
b. Both statements are FALSE
c. 1st statement is TRUE; 2nd statement is FALSE.
d. 1 statement is FALSE; 2nd statement is TRUE
st

4. Statement 1 For CVP analysis, both variable and fixed costs are assumed to have a linear relationship
within the relevant range of activity.
Statement 2 The relevant range of activity is the activity level where the firm will earn income.
a. Both statements are TRUE
b. Both statements are FALSE
c. 1st statement is TRUE; 2nd statement is FALSE.
d. 1 statement is FALSE; 2nd statement is TRUE
st

5. Statement 1 Costs will not change in total within the relevant range of activity.
Statement 2 The high-low method is used in classifying a mixed cost into its variable and fixed elements.
a. Both statements are TRUE
b. Both statements are FALSE
c. 1st statement is TRUE; 2nd statement is FALSE.
d. 1 statement is FALSE; 2nd statement is TRUE
st

6. Statement 1 Both variable and fixed costs are included in calculating the contribution margin.
Statement 2 A CVP income statement shows contribution margin instead of gross profit.
a. Both statements are TRUE
b. Both statements are FALSE
c. 1st statement is TRUE; 2nd statement is FALSE.
d. 1st statement is FALSE; 2nd statement is TRUE

7. Statement 1 The break-even point is equal to the fixed costs plus net income.
Statement 2 If the unit contribution margin is $1 and unit sales are 15,000 units above the break-even
volume, then net income will be $15,000.
a. Both statements are TRUE
b. Both statements are FALSE
c. 1st statement is TRUE; 2nd statement is FALSE.
d. 1 statement is FALSE; 2nd statement is TRUE
st
 8. Statement 1 The break-even point is where total sales equal total variable costs.
Statement 2 At the break-even point, total revenue equals total fixed costs plus total variable costs.
a. Both statements are TRUE
b. Both statements are FALSE
c. 1st statement is TRUE; 2nd statement is FALSE.
d. 1st statement is FALSE; 2nd statement is TRUE

9. Statement 1 A target net income is calculated by taking actual sales minus the margin of safety.
Statement 2 Target net income is the income objective for an individual product line.
a. Both statements are TRUE
b. Both statements are FALSE
c. 1st statement is TRUE; 2nd statement is FALSE.
d. 1 statement is FALSE; 2nd statement is TRUE
st

10. Statement 1 The margin of safety is the difference between contribution margin and fixed costs.
Statement 2 The margin of safety is the difference between sales at breakeven and sales at a determined
activity level.
a. Both statements are TRUE
b. Both statements are FALSE
c. 1st statement is TRUE; 2nd statement is FALSE.
d. 1 statement is FALSE; 2nd statement is TRUE
st

PROBLEM 2
Snara Company accumulates the following data concerning a mixed cost, using miles as the activity level.
Miles Driven Total Cost Miles Driven Total Cost
January 10,000 $15,000 March 9,000 $12,500
February 8,000 $14,500 April 7,500 $13,000
Instructions
Compute the variable and fixed cost elements using the high-low method.

PROBLEM 3
Sam Company makes 2 products, footballs and baseballs. Additional information follows:
Footballs Baseballs
Units 4,000 2,500
Sales $60,000 $25,000
Variable costs 36,000 7,000
Fixed costs 9,000 9,000
Net income $15,000 $ 9,000

Profit per unit $3.75 $3.60

Instructions
Sam has unlimited demand for both products. Therefore, which product should Sam tell his sales people to
emphasize?

PROBLEM 4
Determine the missing amounts.
Contribution Contribution
Unit Selling Price Unit Variable Costs
Margin per Unit Margin Ratio
1. $300 $210 A. B.
2. $600 C. $120 D.
 3. E. F. $400 40%

PROBLEM 5
Whitey’s Fish Camp has sales of $1,500,000 for the first quarter of 2008. In making the sales, the
company incurred the following costs and expenses.
Variable Fixed
Product costs $400,000 $550,000
Selling expenses 100,000 75,000
Administrative expenses 80,000 67,000

Instructions
Calculate net income under CVP for 2008.
PrOBLEM 6
Wellington Cabinets has fixed costs totaling $96,000. Its contribution margin per unit is $1.50,
and the selling price is $5.50 per unit.
Instructions Compute the break-even point in units.
PROBLEM 7
Diaz Donuts sells boxes of donuts each with a variable cost percentage of 37.5%. Its fixed costs
are $46,875 per year.
Instructions Determine the sales dollars Diaz needs to break even per year.
PROBLEM 8
Kettle Goods Company has a unit selling price of $500, variable cost per unit $300, and fixed
costs of $170,000.
Instructions Compute the break-even point in units and in sales dollars.

PROBLEM 9
At break-even point, a company sells 1,200 widgets. Its selling price is $6 per widget, variable
cost is $2 per widget, and its fixed cost is $4 per widget.
Instructions If it sells 100 additional widgets, determine the company’s incremental profit.
PROBLEM 10
The following monthly data are available for Marketplace, Inc. which produces only one product
which it sells for $18 each. Its unit variable costs are $8, and its total fixed expenses are $15,000.
Actual sales for the month of May totaled 2,000 units.
Instructions Compute the margin of safety in units and dollars for the company for May.

PROBLEM 11
Manhattan Cookery reported actual sales of $2,000,000, and fixed costs of $400,000. The
contribution margin ratio is 25%. Instructions Compute the margin of safety in dollars and
the margin of safety ratio.
Problem 12
Lane Company has prepared the following cost-volume-profit graph:

I
H
B
E
A

G
C

Instructions
For the items listed below, enter to the left of the item, the letter in the graph which best
corresponds to the item.
EXERCISES
Ex. 1
In 2023, Green Company had a break-even point of $800,000 based on a selling price of $10 per
unit and fixed costs of $240,000. In 2024, the selling price and variable costs per unit did not
change, but the break-even point increased to $900,000.
Instructions
(a) Compute the variable cost per unit and the contribution margin ratio for 2023.
(b) Using the contribution margin ratio, compute the increase in fixed costs for 2024.
Ex. 2
The income statement for Baxter Company for 2023 appears below.
BAXTER COMPANY
Income Statement
For the Year Ended December 31, 2023
———————————————————————————————————————
———
Sales (40,000 units)........................................................................................ $1,000,000
Variable expenses.......................................................................................... 700,000
Contribution margin....................................................................................... 300,000
Fixed expenses............................................................................................... 330,000
Net income (loss)........................................................................................... $ (30,000)
Instructions
Answer the following independent questions and show computations using the contribution
margin technique to support your answers:
1. What was the company's break-even point in sales dollars in 20123?
2. How many additional units would the company have had to sell in 2024 in order to earn net
income of $30,000?
3. If the company is able to reduce variable costs by $2.50 per unit in 2024 and other costs and
unit revenues remain unchanged, how many units will the company have to sell in order to
earn a net income of $35,000?
Ex. 3
Rush Company developed the following information for its product:
Per Unit
Sales price $90
Variable cost 54
Contribution margin $36

Total fixed costs $1,080,000

Instructions
Answer the following independent questions and show computations using the contribution
margin technique to support your answers.
1. How many units must be sold to break even?
2. What is the total sales that must be generated for the company to earn a profit of $60,000?
3. If the company is presently selling 45,000 units, but plans to spend an additional $108,000 on
an advertising program, how many additional units must the company sell to earn the same
net income it is now making?
4. Using the original data in the problem, compute a new break-even point in units if the unit
sales price is increased 20%, unit variable cost is increased by 10%, and total fixed costs are
increased by $135,000.
Ex. 4
Santa's Toys Manufacturing's sales slumped badly in 2023 due to so many people purchasing
gifts online. The company's income statement showed the following results from selling 500,000
units of product: net sales $2,125,000; total costs and expenses $2,500,000; and net loss
$375,000. Costs and expenses consisted of the following:
Total Variable Fixed
Cost of goods sold $2,000,000 $1,300,000 $ 700,000
Selling expenses 200,000 50,000 150,000
Administrative expenses 300,000 150,000 150,000
$2,500,000 $1,500,000 $1,000,000
Management is considering the following alternative for 2024:
Purchase new automated equipment that will change the proportion between variable and
fixed expenses sold to 45% variable and 55% fixed.
Instructions
(a) Compute the break-even point in dollars for 2023.
(b) Compute the break-even point in dollars under the alternative course of action.
Ex. 5
Keller Company estimates that variable costs will be 60% of sales and fixed costs will total
$1,920,000. The selling price of the product is $10, and 600,000 units will be sold.
Instructions
Using the mathematical equation,
(a) Compute the break-even point in units and dollars.
(b) Compute the margin of safety in dollars and as a ratio.
(c) Compute net income.
Ex. 6
Wayman Company developed the following information for the product it sells:

Sales price $50 per unit

Variable cost of goods sold $23 per unit
Fixed cost of goods sold $800,000
Variable selling expense 10% of sales price
Variable administrative expense $2.00 per unit
Fixed selling expense $400,000
Fixed administrative expense $300,000
For the year ended December 31, 2023, Wayman Company produced and sold 100,000 units of
product.
Instructions
(a) Prepare a CVP income statement for Wayman Company for 2023.
(b) What was the company's break-even point in units in 2023? Use the contribution margin
technique.
(c) What was the company's margin of safety in dollars in 2023?
Ex. 7
Sports Fanatic earned net income of $100,000 during 2023. The company wants to earn net
income of $40,000 more during 2009. The company's fixed costs are expected to be $84,000, and
variable costs are expected to be 30% of sales.
Instructions
(a) Determine the required sales to meet the target net income during 2024.
(b) Fill in the dollar amounts for the summary income statement for 2024 below, based on your
answer to part (a).
Sales revenue $
Variable costs
Contribution margin
Fixed costs
Net income $

Ex. 8
Down Company has a unit selling price of $500, variable cost per unit of $300, and fixed costs of
$220,000.
Instructions Compute the break-even point in units and in sales dollars.
Ex. 9
Alley Company makes student book bags that sell for $20 each. For the coming year,
management expects fixed costs to be $240,000. Variable costs are $15 per unit.
Instructions
(a) Compute break-even sales in dollars using the mathematical equation.
(b) Compute break-even sales using the contribution margin ratio.
(c) Compute margin of safety ratio assuming actual sales are $1,200,000.
(d) Compute the sales required to earn net income of $120,000, using the mathematical
equation.
Ex. 10
Sayler Company earned net income of $350,000 last year. This year it wants to earn net income
of $400,000. The company's fixed costs are expected to be $300,000, and variable costs are
expected to be 60% of sales.
Instructions
(a) Determine the required sales to meet the target net income of $400,000 using the
mathematical equation.
(b) Using a CVP income statement format, prove your answer.
Ex. 11
Quiltworks Company reported actual sales of $2,000,000, and fixed costs of $450,000. The
contribution margin ratio is 30%.
Instructions Compute the margin of safety in dollars and the margin of safety ratio.