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CHAPTER 3

COST-VOLUME-PROFIT ANALYSIS

TRUE/FALSE

1. To perform cost-volume-profit analysis, a company must be able to separate costs

into fixed and variable components.

Answer: True Difficulty: 1 Objective: 1 Terms to Learn: cost-volume-profit (CVP) analysis

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

proportion of different products remains constant.

Answer: True Difficulty: 1 Objective: 1 Terms to Learn: cost-volume-profit (CVP) analysis, sales mix

3. It is assumed in CVP analysis that the unit selling price, unit variable costs, and unit

fixed costs are known and constant.

Answer: False Difficulty: 2 Objective: 1 Terms to Learn: cost-volume-profit (CVP) analysis

It is assumed in CVP analysis that the unit selling price, unit variable costs, and

total fixed costs are known and constant.

4. In CVP analysis, the number of output units is the only revenue driver.

Answer: True Difficulty: 2 Objective: 1 Terms to Learn: cost-volume-profit (CVP) analysis, revenue driver

5. Many companies find even the simplest CVP analysis helps with strategic and long-

range planning.

Answer: True Difficulty: 1 Objective: 1 Terms to Learn: cost-volume-profit (CVP) analysis

6. In CVP analysis, total costs can be separated into a fixed component that does not

vary with output and a component that is variable with output level.

Answer: True Difficulty: 2 Objective: 1 Terms to Learn: cost-volume-profit (CVP) analysis

7. In CVP analysis, variable costs include direct variable costs, but do not include

indirect variable costs.

Answer: False Difficulty: 2 Objective: 1 Terms to Learn: cost-volume-profit (CVP) analysis

In CVP analysis variable costs include direct variable costs and indirect variable costs.

8. In CVP analysis, an assumption is made that the total revenues are linear with

respect to output units, but that total costs are non-linear with respect to output units.

Answer: False Difficulty: 2 Objective: 1 Terms to Learn: cost-volume-profit (CVP) analysis

In CVP analysis, an assumption is made that the total revenues and the total costs are non-linear with respect to output units.

9. A revenue driver is defined as a variable that causes changes in prices.

Answer: False Difficulty: 2 Objective: 1 Terms to Learn: revenue driver

A revenue driver is defined as a variable that causes changes in revenues.

10. If the selling price per unit is $20 and the contribution margin percentage is 30%,

then the variable cost per unit must be $6.

Answer: False Difficulty: 2 Objective: 2 Terms to Learn: contribution margin

Then the variable cost per unit must be $14, [$20 – (.30 x $20)] = $14.

11. Total revenues less total fixed costs equal the contribution margin.

Answer: False Difficulty: 1 Objective: 2 Terms to Learn: contribution margin

Total revenues less total variable costs equal the contribution margin.

12. Gross margin is reported on the contribution income statement.

Answer: True Difficulty: 1 Objective: 2 Terms to Learn: contribution income statement

13. If the selling price per unit of a product is $30, variable costs per unit are $20, and

total fixed costs are $10,000 and a company sells 5,000 units, operating income

would be $40,000.

Answer: True Difficulty: 2 Objective: 2 Terms to Learn: contribution income statement

14. The selling price per unit is $30, variable cost per unit $20, and fixed cost per unit is

$3. When this company operates above the breakeven point, the sale of one more unit will increase net income by $7.

Answer: False Difficulty: 2 Objective: 3 T erms to Learn: contribution income statement

The sale of one more unit will increase net income by $10, ($30 – $20 = $10). 15. A company with sales of $100,000, variable costs of $70,000, and fixed costs of

$50,000 will reach its breakeven point if sales are increased by $20,000.

Answer: False Difficulty: 2 Objective: 3 T erms to Learn: breakeven point (BEP)

$50,000 / 0.30 = $166,667 of total sales are needed to break even.

16. Breakeven point is not a good planning tool since the goal of business is to make a

profit.

Answer: False Difficulty: 2 Objective: 3 Terms to Learn: breakeven point (BEP)

Breakeven point is an important planning tool that helps managers determine

volume of sales/production needed to be profitable.

17. Breakeven point is that quantity of output where total revenues equal total costs.

Answer: True Difficulty: 1 Objective: 3 Terms to Learn: breakeven point (BEP)

18. In the graph method of CVP analysis, the breakeven point is the quantity of units

sold for which the total revenues line crosses the X-axis.

Answer: True Difficulty: 1 Objective: 3 Terms to Learn: breakeven point (BEP)

19. A profit-volume graph shows the impact on operating income from changes in the

output level.

Answer: True Difficulty: 1 Objective: 3 Terms to Learn: PV Graph

20. If the selling price per unit of a product is $50, variable costs per unit are $40, and

total fixed costs are $50,000, a company must sell 6,000 units to make a target

operating income of $10,000.

Answer: True Difficulty: 3 Objective: 3 Terms to Learn: cost-volume-profit (CVP) analysis

21. An increase in the tax rate will increase the breakeven point.

Answer: False Difficulty: 2 Objective: 4 Terms to Learn:net income

A change in the tax rate will not change the breakeven point.

22. If operating income is $70,000 and the income tax rate is 30%, then net income will

be $49,000.

Answer: True Difficulty: 1 Objective: 4 Terms to Learn:net income

23. If planned net income is $21,000 and the tax rate is 30%, then planned operating

income would be $27,300.

Answer: False Difficulty: 2 Objective: 4 Terms to Learn: net income

If planned net income is $21,000 and the tax rate is 30%, then planned operating

income would be $30,000, [$21,000 / (1.0 – .3) = $30,000].

24. Sensitivity analysis is a “what-if” technique that managers use to examine how a

result will change if the originally predicted data are not achieved or if an

underlying assumption changes.

Answer: True Difficulty: 1 Objective: 5 Terms to Learn: sensitivity analysis

25. Margin of safety measures the difference between budgeted revenues and

breakeven revenues.

Answer: True Difficulty: 1 Objective: 5 Terms to Learn: margin of safety

26. Sensitivity analysis helps to evaluate the risk associated with decisions.

Answer: True Difficulty: 1 Objective: 5 Terms to Learn: sensitivity analysis

27. If contribution margin decreases by $1 per unit, then operating profits will increase

by $1 per unit.

Answer: False Difficulty: 2 Objective: 5 Terms to Learn:contribution margin per unit

If contribution margin decreases by $1 per unit, then operating profits will decrease by $1 per unit.

28. If variable costs per unit increase, then the breakeven point will decrease.

Answer: False Difficulty: 3 Objective: 5 Terms to Learn: breakeven point (BEP)

If variable costs per unit increase, then the breakeven point will also increase. 29. A planned increase in advertising would be considered an increase in fixed costs in

CVP analysis.

Answer: True Difficulty: 2 Objective: 5 Terms to Learn: cost-volume-profit (CVP) analysis

30. A planned decrease in selling price would be expected to cause an increase in the

quantity sold.

Answer: True Difficulty: 2 Objective: 5 Terms to Learn: cost-volume-profit (CVP) analysis

31. Companies with a greater proportion of fixed costs have a greater risk of loss than

companies with a greater proportion of variable costs.

Answer: True Difficulty: 2 Objective: 6 Terms to Learn: operating leverage

32. If a company increases fixed costs, then the breakeven point will be lower.

Answer: False Difficulty: 3 Objective: 6 Terms to Learn: breakeven point (BEP)

If a company increases fixed costs, then the breakeven point will be higher.

33. Companies that are substituting fixed costs for variable costs receive a greater per

unit return above the breakeven point.

Answer: True Difficulty: 3 Objective: 6 Terms to Learn: operating leverage

34. A company with a high degree of operating leverage is at lesser risk during

downturns in the economy.

Answer: False Difficulty: 3 Objective: 6 Terms to Learn: operating leverage

A company with a high degree of operating leverage is at greater risk during

downturns in the economy.

35. Whether the purchase cost of a machine is treated as fixed or variable depends

heavily on the time horizon being considered.

Answer: True Difficulty: 1 Objective: 6 Terms to Learn: operating leverage

36. If a company has a degree of operating leverage of 2.0, that means a 20% increase

in sales will result in a 40% increase in variable costs.

Answer: False Difficulty: 3 Objective: 6 Terms to Learn:operating leverage

If a company has a degree of operating leverage of 2.0, that means a 20% increase in sales will result in a 40% increase in operating income.

37. When a company has at least some fixed costs, the degree of operating leverage is

different at different levels of sales.

Answer: True Difficulty: 2 Objective: 6 Terms to Learn: o perating leverage

38. Passenger-miles are a potential measure of output for the airline industry.

Answer: True Difficulty: 1 Objective: 7 Terms to Learn: cost-volume-profit (CVP) analysis

39. In multiproduct situations when sales mix shifts toward the product with the lowest

contribution margin, the breakeven quantity will decrease.

Answer: False Difficulty: 3 Objective: 7 Terms to Learn: sales mix

In multiproduct situations when sales mix shifts toward the product with the lowest contribution margin, the breakeven quantity will increase.

40. In multiproduct situations when sales mix shifts toward the product with the highest

contribution margin, operating income will be higher.

Answer: True Difficulty: 3 Objective: 7 Terms to Learn: sales mix

41. To calculate the breakeven point in a mult-product situation, one must assume that

the sales mix of the various products remains constant.

Answer: True Difficulty: 2 Objective: 7 Terms to Learn: sales mix

42. If a company’s sales mix is 2 units of product A for every 3 units of product B, and

the company sells 1,000 units in total of both products, only 200 units of product A will be sold.

Answer: False Difficulty: 2 Objective: 7 Terms to Learn: sales mix

If a company’s sales mix is 2 units of product A for every 3 units of product B, and the company sells 1,000 units in total of both products, 400 units of product A will be sold and 600 units of product B will be sold.

43. There is no unique breakeven point when there are multiple cost drivers.

Answer: True Difficulty: 2 Objective: 8 Terms to Learn: cost-volume-profit (CVP) analysis

44. When there are multiple cost drivers the simple CVP formula of Q = (FC +

OI)/CMU can still be used.

Terms to Learn: cost-volume-profit (CVP) analysis

Answer: False Difficulty: 1 Objective: 8 When there are multiple cost drivers the simple CVP formula no longer applies. 45. Service sector companies will never report gross margin on an income statement. Answer: True Difficulty: 2 Objective: 9 Terms to Learn: gross margin percentage

46. For merchandising firms, contribution margin will always be a lesser amount than

gross margin.

Answer: True Difficulty: 3 Objective: 9 Terms to Learn: contribution margin

True, because all variable costs are subtracted to compute contribution margin, but only COGS is subtracted to compute gross margin.

47. Contribution margin and gross margin are terms that can be used interchangeably. Answer: False Difficulty: 1 Objective: 9 Terms to Learn: contribution margin

Contribution margin and gross margin refer to different amounts.

Revenues – all variable costs = contribution margin; Revenues – COGS = gross

margin

48. If Johnson’s Manufacturing presented a Financial Accounting Income Statement

emphasizing gross margin showing operating income of $18,000, a Contribution

Income Statement emphasizing contribution margin would show a different

operating income.

Answer: False Difficulty: 2 Objective: 9 Terms to Learn: contribution income statement

If Johnson’s Manufacturing presented a Financial Accounting Income Statement

emphasizing gross margin showing operating income of $18,000, a Contribution

Income Statement emphasizing contribution margin would show the same operating income.

49. An expected value is the weighted average of the outcomes, with the probability of

each outcome serving as the weight.

Answer: True Difficulty: 2 Objective: A Terms to Learn: expected value

MULTIPLE CHOICE

50. Cost-volume-profit analysis is used PRIMARILY by management:

a. as a planning tool

b. for control purposes

c. to prepare external financial statements

d. to attain accurate financial results

Answer: a Difficulty: 1 Objective: 1 Terms to Learn: cost-volume-profit (CVP)

51. Cost-volume-profit analysis assumes all of the following EXCEPT:

a. all costs are variable or fixed

b. units manufactured equal units sold

c. total variable costs remain the same over the relevant range

d. total fixed costs remain the same over the relevant range

Answer: c Difficulty: 2 Objective: 1 Terms to Learn: cost-volume-profit (CVP)

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

a. Total costs can be divided into a fixed component and a component that is

variable with respect to the level of output.

b. When graphed, total costs curve upward.

c. The unit-selling price is known and constant.

d. All revenues and costs can be added and compared without taking into

account the time value of money.

Answer: b Difficulty: 3 Objective: 1 Terms to Learn: cost-volume-profit (CVP)

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

a. Costs may be separated into separate fixed and variable components.

b. Total revenues and total costs are linear in relation to output units.

c. Unit selling price, unit variable costs, and unit fixed costs are known and

remain constant.

d. Proportion of different products will remain constant when multiple products

are sold.

Answer: c Difficulty: 3 Objective: 1 Terms to Learn: cost-volume-profit (CVP)

54. A revenue driver is defined as:

a. any factor that affects costs and revenues

b. any factor that affects revenues

c. only factors that can influence a change in selling price

d. only factors that can influence a change in demand

Answer: b Difficulty: 1 Objective: 1 Terms to Learn: revenue driver

55. Operating income calculations use:

a. net income

b. income tax expense

c. cost of goods sold and operating costs

d. nonoperating revenues and nonoperating expenses

Answer: c Difficulty: 2 Objective: 1 Terms to Learn: revenue driver

56. Which of the following statements about net income (NI) is TRUE?

a. NI = operating income plus nonoperating revenue.

b. NI = operating income plus operating costs.

c. NI = operating income less income taxes.

d. NI = operating income less cost of goods sold.

Answer: c Difficulty: 1 Objective: 1 Terms to Learn: net income

57. Which of the following is true about the assumptions underlying basic CVP

analysis?

a. Only selling price is known and constant.

b. Only selling price and variable cost per unit are known and constant.

c. Only selling price, variable cost per unit, and total fixed costs are known and

constant.

d. Selling price, variable cost per unit, fixed cost per unit, and total fixed costs

are known and constant.

Answer: c Difficulty: 2 Objective: 1 Terms to Learn: cost-volume-profit (CVP)

58. The contribution income statement:

a. reports gross margin

b. is allowed for external reporting to shareholders

c. categorizes costs as either direct or indirect

d. can be used to predict future profits at different levels of activity

Answer: d Difficulty: 1 Objective: 2 Terms to Learn: contribution income statement

59. Contribution margin equals:

a. revenues minus period costs

b. revenues minus product costs

c. revenues minus variable costs

d. revenues minus fixed costs

Answer: c Difficulty: 1 Objective: 2 Terms to Learn: contribution margin

60. The selling price per unit less the variable cost per unit is the:

a.fixed cost per unit

b.gross margin

c. margin of safety

d. contribution margin per unit

Answer: d Difficulty: 1 Objective: 2 Terms to Learn: contribution margin

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 61 THROUGH 64: Kaiser’s Kraft Korner sells a single product. 7,000 units were sold resulting in $70,000 of sales revenue, $28,000 of variable costs, and $12,000 of fixed costs.

61. Contribution margin per unit is

a. $4.00

b. $4.29

c. $6.00

d. None of these answers are correct.

Answer: c Difficulty: 2 Objective: 2 Terms to Learn: contribution margin per unit

($70,000 – $28,000) / 7,000 units = $6 per unit

62. Breakeven point in units is:

a. 2,000 units

b. 3,000 units

c. 5,000 units

d. None of these answers are correct.

Answer: a Difficulty: 2 Objective: 3 Terms to Learn: breakeven point (BEP)

$10X – $4X – $12,000 = 0; X = 2,000 units

63. The number of units that must be sold to achieve $60,000 of operating income is:

a. 10,000 units

b. 11,666 units

c. 12,000 units

d. None of these answers are correct.

Answer: c Difficulty: 2 Objective: 3 Terms to Learn: cost-volume-profit (CVP) analysis

10X – 4X – 12,000 = 60,000; X = 12,000 units

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

a. $10,000

b. $15,000

c. $22,200

d. None of these answers are correct.

Answer: b Difficulty: 2 Objective: 2 Terms to Learn: cost-volume-profit (CVP) analysis

[($70,000 – $28,000) / $70,000] x $25,000 = $15,000

65. Schuppener Company sells its only product for $18 per unit, variable production

costs are $6 per unit, and selling and administrative costs are $3 per unit. Fixed

costs for 10,000 units are $10,000. The contribution margin is:

a. $12 per unit

b. $9 per unit

c. $11 per unit

d. $8 per unit

Answer: b Difficulty: 2 Objective: 2 Terms to Learn: cost-volume-profit (CVP) analysis

$18 – $6 – $3 = $9

66. The contribution income statement highlights:

a. gross margin

b. products costs and period costs

c. different product lines

d. variable and fixed costs

Answer: d Difficulty: 2 Objective: 2 Terms to Learn: contribution in come statement

67. Fixed costs equal $12,000, unit contribution margin equals $20, and the number of

units sold equal 1,600. Operating income is:

a. $12,000

b. $20,000

c. $32,000

d. $40,000

Answer: b Difficulty: 3 Objective: 2 Terms to Learn: cost-volume-profit (CVP) analysis

(1,600 x $20) – $12,000 = $20,000

68. If selling price per unit is $30, variable costs per unit are $20, total fixed costs are

$10,000, the tax rate is 30%, and the company sells 5,000 units, net income is:

a. $12,000

b. $14,000

c. $28,000

d. $40,000

Answer: c Difficulty: 2 Objective: 2 Terms to Learn: cost-volume-profit (CVP) analysis

[(($30 – $20) x 5,000) – $10,000] x (1.0 – .3) = $28,000

69. At the breakeven point of 200 units, variable costs total $400 and fixed costs total

$600. The 201st unit sold will contribute ___________ to profits.

a. $1

b. $2

c. $3

d. $5

Answer: c Difficulty: 3 Objective: 3 Terms to Learn: contribution margin

$1,000 – $400 – $600 = 0; Sales ($1,000 / 200) – Variable costs ($400 / 200) = $3 CM

70. The breakeven point is the activity level where:

a. revenues equal fixed costs

b. revenues equal variable costs

c. contribution margin equals variable costs

d. revenues equal the sum of variable and fixed costs

Answer: d Difficulty: 3 Objective: 3 Terms to Learn: breakeven point

71. Breakeven point is:

a. total costs divided by variable costs per unit

b. contribution margin per unit divided by revenue per unit

c. fixed costs divided by contribution margin per unit

d. the sum of fixed and variable costs divided by contribution margin per unit Answer: c Difficulty: 2 Objective: 3 Terms to Learn: breakeven point

72. Sales total $200,000 when variable costs total $150,000 and fixed costs total

$30,000. The breakeven point in sales dollars is:

a. $200,000

b. $120,000

c. $ 40,000

d. $ 30,000

Answer: b Difficulty: 3 Objective: 3 Terms to Learn: breakeven point

($200,000 – $150,000) / $200,000 = 25% CM%; $30,000 / 0.25 = $120,000 BE sales

73. The breakeven point in CVP analysis is defined as:

a. when fixed costs equal total revenues

b. fixed costs divided by the contribution margin per unit

c. revenues less variable costs equal operating income

d. when the contribution margin percentage equals total revenues divided by

variable costs

Answer: b Difficulty: 2 Objective: 3 Terms to Learn: breakeven point

74. Which of the following statements about determining the breakeven point is

FALSE?

a. Operating income is equal to zero.

b. Contribution margin - fixed costs is equal to zero.

c. Revenues equal fixed costs plus variable costs.

d. Breakeven revenues equal fixed costs divided by the variable cost per unit. Answer: d Difficulty: 3 Objective: 3 Terms to Learn: breakeven point

75. What is the breakeven point in units, assuming a product's selling price is $100,

fixed costs are $8,000, unit variable costs are $20, and operating income is

$32,000?

a. 100 units

b. 300 units

c. 400 units

d. 500 units

Answer: a Difficulty: 2 Objective: 3 Terms to Learn: breakeven point

$100N – $20N – $8,000 = 0; $80N = $8,000; N = 100 units

76. If unit outputs exceed the breakeven point:

a. there is a loss

b. total sales revenue exceeds total costs

c. there is a profit

d. Both total sales revenue exceeds total costs and there is a profit.

Answer: d Difficulty: 2 Objective: 3 Terms to Learn: breakeven point

77. How many units would have to be sold to yield a target operating income of

$22,000, assuming variable costs are $15 per unit, total fixed costs are $2,000, and the unit selling price is $20?

a. 4,800 units

b. 4,400 units

c. 4,000 units

d. 3,600 units

Answer: a Difficulty: 3 Objective: 3 Terms to Learn: cost-volume-profit (CVP) analysis

($2,000 + $22,000) / ($20 – $15) = 4,800 units

78. If the breakeven point is 100 units and each unit sells for $50, then:

a. selling 125 units will result in a profit

b. sales of $4,000 will result in a loss

c. sales of $5,000 will result in zero profit

d. All of these answers are correct.

Answer: d Difficulty: 2 Objective: 3 Terms to Learn: breakeven point (BEP)

100 x $50 – $5,000 of BE sales

79. If breakeven point is 100 units, each unit sells for $30, and fixed costs are $1,000,

then on a graph the:

a. total revenue line and the total cost line will intersect at $3,000 of revenue

b. total cost line will be zero at zero units sold

c. revenue line will start at $1,000

d. All of these answers are correct.

Answer: a Difficulty: 2 Objective: 3 Terms to Learn: breakeven point (BEP)

80. When fixed costs are $100,000 and variable costs are 20% of the selling price, then

breakeven sales are:

a. $100,000

b. $125,000

c. $500,000

d. indeterminable

Answer: b Difficulty: 2 Objective: 3 Terms to Learn: breakeven point (BEP)

$100,000 / (1- 0.20) = $125,000 in BE sales

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 81 THROUGH 84: Ruben intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the airline carrier for $150 each. The round-trip tickets will be sold for $200 each and the airline intends to reimburse Ruben for any unsold ticket packages. Fixed costs include $5,000 in advertising costs.

81. What is the contribution margin per ticket package?

a. $50

b. $100

c. $150

d. $200

Answer: a Difficulty: 1 Objective: 3 Terms to Learn: contribution margin per unit

$200 – $150 = $50

82. How many ticket packages will Ruben need to sell to break even?

a. 34 packages

b. 50 packages

c. 100 packages

d. 150 packages

Answer: c Difficulty: 2 Objective: 3 Terms to Learn: breakeven point (BEP)

$200X – $150X – $5,000 = 0; X = 100

83. How many ticket packages will Ruben need to sell in order to achieve $60,000 of

operating income?

a. 367 packages

b. 434 packages

c. 1,100 packages

d. 1,300 packages

Answer: d Difficulty: 2 Objective: 3 Terms to Learn: cost-volume-profit (CVP) analysis

$200X – $150X – $5,000 = $60,000; X = 1,300

84. For every $25,000 of ticket packages sold, operating income will increase by:

a. $6,250

b. $12,500

c. $18,750

d. an indeterminable amount

Answer: a Difficulty: 3 Objective: 3 Terms to Learn: cost-volume-profit (CVP) analysis

$25,000 x [($200 – $150 / $200)] = $6,250

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 85 THROUGH 88: Northenscold Company sells several products. Information of average revenue and costs is as follows:

Selling price per unit $20.00

Variable costs per unit:

Direct material $4.00

Direct manufacturing labor $1.60

Manufacturing overhead $0.40

Selling costs $2.00

Annual fixed costs $96,000

85. The contribution margin per unit is:

a. $6

b. $8

c. $12

d. $14

Answer: c Difficulty: 2 Objective: 2 Terms to Learn: contribution margin per unit

$20 – $4 – $1.60 – $0.40 – $2 = $12

86. The number of units that Northenscold’s must sell each year to break even is:

a. 8,000 units

b. 12,000 units

c. 16,000 units

d. indeterminable

Answer: a Difficulty: 2 Objective: 3 Terms to Learn: breakeven point (BEP)

$20X – $8X – $96,000 = 0; X = 8,000 units

87. The number of units that Northenscold’s must sell annually to make a profit of

$144,000 is:

a. 12,000 units

b. 18,000 units

c. 20,000 units

d. 30,000 units

Answer: c Difficulty: 2 Objective: 3 Terms to Learn: cost-volume-profit (CVP) analysis

$20X – $8X – $96,000 = $144,000; X = 20,000 units

88. All of the following are assumed in the above analysis EXCEPT:

a. a constant product mix

b. fixed costs increase when activity increases

c. cost and revenue relationships are reflected accurately

d. all costs can be classified as either fixed or variable

Answer: b Difficulty: 2 Objective: 1 Terms to Learn: cost-volume-profit (CVP) analysis

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 89 AND 90:

The following information is for Nichols Company:

Selling price $150 per unit

Variable costs $90 per unit

Total fixed costs $300,000

89. The number of units that Nichols Company must sell to reach targeted operating

income of $90,000 is:

a. 5,000 units

b. 6,500 units

c. 3,334 units

d. 4,334 units

Answer: b Difficulty: 2 Objective: 3 Terms to Learn: cost-volume-profit (CVP) analysis

($300,000 + $90,000)/($150 - $90) = 6,500 units

90. If targeted operating income is $120,000, then targeted sales revenue is:

a. $1,050,000

b. $700,000

c. $500,000

d. $750,000

Answer: a Difficulty: 2 Objective: 3 Terms to Learn: cost-volume-profit (CVP) analysis

($300,000 + $120,000) / [($150 – $90) / $150] = $1,050,000

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 91 THROUGH 93: Stephanie’s Bridal Shoppe sells wedding dresses. The average selling price of each dress

is $1,000, variable costs are $400, and fixed costs are $90,000.

91. What is the Bridal Shoppe's operating income when 200 dresses are sold?

a. $30,000

b. $80,000

c. $200,000

d. $100,000

Answer: a Difficulty: 2 Objective: 3 Terms to Learn: cost-volume-profit (CVP) analysis

200($1,000) – 200($400) – $90,000 = $30,000

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

a. 225 dresses

b. 150 dresses

c. 100 dresses

d. 90 dresses

Answer: b Difficulty: 2 Objective: 3 Terms to Learn: cost-volume-profit (CVP) analysis

$1,000N – $400N – $90,000 = 0; $600N = $90,000; N = 150 dresses

93. How many dresses must the Bridal Shoppe sell to yield after-tax net income of

$18,000, assuming the tax rate is 40%?

a. 200 dresses

b. 170 dresses

c. 150 dresses

d. 145 dresses

Answer: a Difficulty: 3 Objective: 4 Terms to Learn: net income

$1,000N – $400N – $90,000 = $18,000 / (1 – 0.4); $600N – $90,000 = $30,000; N = 200 units THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 94 AND 95:

Assume the following cost information for Fernandez Company:

Selling price $120 per unit

Variable costs $80 per unit

Total fixed costs $80,000

Tax rate 40%

94. What minimum volume of sales dollars is required to earn an after-tax net income

of $30,000?

a. $465,000

b. $330,000

c. $390,000

d. $165,000

Answer: c Difficulty: 3 Objective: 4 Terms to Learn: net income

[$80,000 + ($30,000/0.6)] / [($120 – $80) / $120] = $390,000

95. What is the number of units that must be sold to earn an after-tax net income of

$42,000?

a. 3,750 units

b. 4,625 units

c. 3,050 units

d. 1,875 units

Answer: a Difficulty: 3 Objective: 4 Terms to Learn: net income

[$80,000 + ($42,000 / 0.6)] / ($120 – $80) = 3,750 units

96. In CVP analysis, focusing on target net income rather than operating income:

a. will increase the breakeven point

b. will decrease the breakeven point

c. will not change the breakeven point

d. does not allow calculation of breakeven point

Answer: c Difficulty: 2 Objective: 4 Terms to Learn: net income

97. To determine the effect of income tax on a decision, managers should evaluate:

a. target operating income

b. contribution margin

c. target net income

d. selling price

Answer: c Difficulty: 1 Objective: 4 Terms to Learn: net income