Question 1

When interpreting a CVP graph which of the following is NOT correct?

Accepted Answer

A)  When sales are below the breakeven intersection the company incurs a loss. 
B)  The breakeven point is where the total revenue line meets the fixed cost line. 
C)  The anticipated profit or loss at any given level of sales is measured by the vertical distance between the total revenue line and the total expense line. 
D)  The total revenue line starts at the origin. 
A)  When sales are below the breakeven intersection the company incurs a loss. 
B)  The breakeven point is where the total revenue line meets the fixed cost line. 
C)  The anticipated profit or loss at any given level of sales is measured by the vertical distance between the total revenue line and the total expense line. 
D)  The total revenue line starts at the origin.

Question 2

The following monthly data are available for the Challenger Company and its only product,Product SW:
 $\begin{array}{|l|r|r|}
\hline & \text { Total } & \text { Per Unit } \
\hline \text { Sales (400units) } & \$ 110,000 & \$ 275 \
\hline \text { Variable expenses } & 44,000 & 110 \
\hline \text { Contribution margin } & \$ 66,000 & \$ 165 \
\hline \text { Fixed expenses } & 52,800 & \
\hline \text { Net income } & \$ 13,200 & \
\hline
\end{array}$ 
Required:
a)Without resorting to calculations,what is the total contribution margin at the break-even point?
b)Management is contemplating the use of plastic gearing rather than metal gearing in Product SW.This change would reduce variable costs by $15.The company's marketing manager predicts that this would reduce the overall quality of the product and thus would result in a decline in sales to a level of 350 units per month.Should this change be made?
c)Assume that Challenger Company is currently selling 400 units of Product SW per month.Management wants to increase sales and feels that this can be done by cutting the selling price by $25 per unit and increasing the advertising budget by $20,000 per month.Management believes that these actions will increase unit sales by 50%.Should these changes be made?
d)Assume that Challenger Company is currently selling 400 units of Product SW.Management wants to automate a portion of the production process for Product SW.The new equipment would reduce direct labour costs by $20 per unit but would result in a monthly rental cost for the new robotic equipment of $10,000.Management believes that the new equipment will increase the reliability of Product SW,thus resulting in an increase in monthly sales of 12%.Should these changes be made?

Accepted Answer

a)The total contribution margin is $52,8

Question 3

A company with sales of $80,000 and variable expenses of $40,000 should spend $12,000 on increased advertising,if the increased advertising will increase sales by $22,000.
CM ratio = 50% so incremental CM = 22,000 *.5 which is less than $12,000.

Accepted Answer

A) True 
 B)False

Question 4

Brasher Company manufactures and sells a single product that has a positive contribution margin.If the selling price and variable expenses both decrease by 5% and fixed expenses do not change,then what would be the effect on the contribution margin per unit and the contribution margin ratio?
$\begin{array}{|l|l|l|}
\hline & \begin{array}{l}
\text { Contribution margin per } \
\text { unit }
\end{array} & \text { Contribution margin ratio } \
\hline \text { A) } & \text { Decrease } & \text { Decrease } \
\hline \text { B) } & \text { Decrease } & \text { No change } \
\hline \text { C) } & \text { No change } & \text { Decrease } \
\hline \text { D) } & \text { No change } & \text { No change } \
\hline
\end{array}$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 5

If company A has a higher degree of operating leverage than company B,then which of the following statements is true?

Accepted Answer

A)  Company A has higher variable expenses. 
B)  Company A's profits are more sensitive to percentage changes in sales. 
C)  Company A is more profitable. 
D)  Company A is less risky. 
A)  Company A has higher variable expenses. 
B)  Company A's profits are more sensitive to percentage changes in sales. 
C)  Company A is more profitable. 
D)  Company A is less risky.

Question 6

The following is last month's contribution format income statement:
$\begin{array}{|l|r|}
\hline \text { Sales }(12,000 \text { units) } & \$ 1,200,000 \
\hline \text { Less: variable expenses } & \underline{700,000} \
\hline \text { Contribution margin } & 500,000 \
\hline \text { Less: fixed expenses } & \underline{300,000} \
\hline \text { Operating income } & \$ 200,000 \
\hline
\end{array}$
What is the company's margin of safety percentage,rounded to the nearest whole percent?

Accepted Answer

A)  42%. 
B)  40%. 
C)  17%. 
D)  20%. 
A)  42%. 
B)  40%. 
C)  17%. 
D)  20%.

Question 7

The following information pertains to Rica Company:
$\begin{array}{|l|l|}
\hline \text { Sales }(50,000 \text { units) } & \$ 1,000,000 \
\hline \text { Manufacturing costs: } & \
\hline \text { Variable } & 340,000\\hline \text { Fixed } & 70,000 \
\hline \text { Selling and admin. Expenses: } & \
\hline \text { Variable } & 10,000 \
\hline \text { Fixed } & 60,000\
\hline 
\end{array}$
How much is Rica's break-even point?

Accepted Answer

A)  9,848 units. 
B)  10,000 units. 
C)  18,571 units. 
D)  26,000 units. 
A)  9,848 units. 
B)  10,000 units. 
C)  18,571 units. 
D)  26,000 units.

Question 8

The break-even point in units can be obtained by dividing total fixed expenses by the contribution margin ratio.

Accepted Answer

A) True 
 B)False

Question 9

The following is Allison Corporation's contribution format income statement for last month:
$\begin{array}{|l|r|}
\hline \text { Sales } & \$ 800,000 \
\hline \text { Less: variable expenses } & \underline{300,000} \
\hline \text { Contribution margin } & 500,000 \
\hline \text { Less: fixed expenses } & \underline{400,000} \
\hline \text { Operating income } & \$ 100,000 \
\hline
\end{array}$The company has no beginning or ending inventories. The company produced and sold 10,000 units last month.

-What is the company's degree of operating leverage?

Accepted Answer

A)  0.2. 
B)  8.0. 
C)  1.7. 
D)  5.0. 
A)  0.2. 
B)  8.0. 
C)  1.7. 
D)  5.0.

Question 10

Wallace,Inc.,prepared the following budgeted data based on a sales forecast of $6,000,000:
$\begin{array}{|l|r|r|}
\hline & \text { Variable } & \text { Fixed } \
\hline \text { Direct materials } & \$ 1,600,000 & \
\hline \text { Direct labour } & 1,400,000 & \
\hline \text { Factory overhead } & 600,000 &  \$ 900,000 \
\hline \text { Selling expenses } & 240,000 &360,000\
\hline \text { Administrative expenses } & \underline{60,000} & \underline{140,000} \
\hline \text { Total } & \$ 3,900,000 & \$ 1,400,000  \
\hline
\end{array}$
What would be the amount of sales dollars at the break-even point?

Accepted Answer

A)  $2,250,000. 
B)  $3,500,000. 
C)  $4,000,000. 
D)  $5,300,000. 
A)  $2,250,000. 
B)  $3,500,000. 
C)  $4,000,000. 
D)  $5,300,000.

Question 11

Kern Company prepared the following tentative budget for next year:
$\begin{array}{|l|r|}
\hline \text { Sales } & \$ 500,000 \
\hline \text { Selling price } & \$ 5 \text { per unit } \
\hline \text { Variable expenses } & \$ 300,000 \
\hline \text { Fixed expenses } & \$ 150,000 \
\hline
\end{array}$
The sales manager argues that the unit selling price could be increased by 20%,with an expected volume decrease of only 10%.If Kern incorporates these changes in its budget,what should be the budgeted operating income?

Accepted Answer

A)  $66,000. 
B)  $90,000. 
C)  $120,000. 
D)  $145,000. 
A)  $66,000. 
B)  $90,000. 
C)  $120,000. 
D)  $145,000.

Question 12

A company with a degree of operating leverage of 4 would expect income to increase by 200% if sales increased from $100,000 to $150,000.
Increase in Sales is 50% so income increases 50%*4.

Accepted Answer

A) True 
 B)False

Question 13

Last year,Black Company reported sales of $640,000,a contribution margin of $160,000,and an operating loss of $40,000.Based on this information,what was the break-even point?

Accepted Answer

A)  $640,000. 
B)  $480,000. 
C)  $800,000. 
D)  $960,000. 
A)  $640,000. 
B)  $480,000. 
C)  $800,000. 
D)  $960,000.

Question 14

Wright Corporation's contribution format income statement for last month appears below:
$\begin{array} {| l | r | } 
\hline \text { Sales } & \$ 45,000 \
\hline \text { Less: variable expenses } & \underline { 27,000 } \
\hline \text { Contribution margin } & 18,000 \
\hline \text { Less: fixed expenses } & \underline { 12,000 } \
\hline \text { Operating income } & \$ 6,000 \
\hline
\end{array}$There were no beginning or ending inventories. The company produced and sold 3,000 units during the month

-If sales decrease by 500 units in the next month,by how much would fixed expenses have to be reduced to maintain the current operating income?

Accepted Answer

A)  $7,500. 
B)  $6,000. 
C)  $2,000. 
D)  $3,000. 
A)  $7,500. 
B)  $6,000. 
C)  $2,000. 
D)  $3,000.

Question 15

Seco Corp.,a wholesale supply company,uses independent sales agents to market the company's products.These agents currently receive a commission of 20% of sales,but are demanding an increase to 25% of sales.Seco had already prepared its budget for next year before learning of the sales agents' demand for an increase in commissions.That budgeted income statement appears below:
SECO CORP.
Budgeted Income Statement
 $\begin{array}{|l|l|r|}
\hline \text { Sales } & & \$ 10,000,000 \
\hline \text { Cost of sales } & & \underline{6,000,000} \
\hline \text { Gross margin } & & 4,000,000\\hline \begin{array}{l}
\text { Selling and administrative } \
\text { expenses: }
\end{array} & \\hline \text { Commissions } & \$ 2,000,000 & \
\hline \text { All other expenses (fixed) } & \underline{100,000} & 2,100,000 \
\hline \text { Operating income } & & \$ 1,900,000 \
\hline
\end{array}$ 
Seco is considering the possibility of employing its own salespersons.Three individuals would be required,at a salary of $30,000 each,plus commissions of 5% of sales.In addition,a sales manager would be employed at a fixed annual salary of $160,000.
Required:
a)Compute Seco's break-even point in sales dollars based upon the company's budgeted income statement,assuming that the company continues to use independent sales agents and that they are paid the old commission rate of 20% of sales.
b)Compute Seco's break-even point in sales dollars,assuming that the company employs its own salespersons.
c)Compute the sales dollars required to attain the target profit of $1,900,000,assuming that the company continues to use independent sales agents and the company agrees to their demand for a 25% sales commission.
d)Compute the sales dollars that would be required to generate the same operating income,whether Seco employs its own salespersons or continues to use the independent sales agents and pays them a 25% commission.

Accepted Answer

a)Estimated break-even based on the budg

Question 16

Lindsay Company reported the following results from sales of 5,000 units for the month of June:
$\begin{array}{|l|r|}
\hline \text { Sales } & \$ 200,000 \
\hline \text { Variable expenses } & \$ 120,000 \
\hline \text { Fixed expenses } & \$ 60,000 \
\hline
\end{array}$
Assume that Lindsay increases the selling price of the product by 10% on July 1.How many units would have to be sold in July in order to generate an operating income of $20,000?

Accepted Answer

A)  4,000 units. 
B)  4,300 units. 
C)  4,500 units. 
D)  5,000 units. 
A)  4,000 units. 
B)  4,300 units. 
C)  4,500 units. 
D)  5,000 units.

Question 17

Fletcher Company has three products with the following characteristics:
$\begin{array} { | l | r | r | r | } 
\hline & \text { Product A } & \text { Product B } & \text { Product C } \
\hline \begin{array} { l } 
\text { Monthly sales in } \
\text { dollars }
\end{array} & \$ 60,000 & \$ 80,000 & \$ 100,000 \
\hline \begin{array} { l } 
\text { Contribution margin } \
\text { ratio }
\end{array} & 20 \% & 40 \% & 16 \% \
\hline
\end{array}$Fixed Costs = $30,000 per month.

-If Total sales next month are $330,000 and Fletchers sales mix remains unchanged,the total sales for product C will be closest to:

Accepted Answer

A)  $100,000. 
B)  $110,000. 
C)  $82,500. 
D)  $137,500. 
A)  $100,000. 
B)  $110,000. 
C)  $82,500. 
D)  $137,500.

Question 18

The following monthly budgeted data is available for the Baxter Company:
 $\begin{array}{|l|r|r|r|}
\hline & \text { Product C } & \text { Product J } & \text { Product R } \
\hline \text { Sales } & \$ 660,000 & \$ 380,000 & \$ 660,000 \
\hline \text { Variable expenses } & \underline{396,000} & 266,000 & 528,000 \
\hline \text { Contribution margin } & \$ 264,000 & \$ 114,000 & \$ 132,000 \
\hline
\end{array}$ 
Budgeted operating income for the month is $260,000.
Required:
a)Calculate the break-even sales for the month.
b)Calculate the margin of safety.
c)Calculate the degree of operating leverage.

Accepted Answer

None

Question 19

Wright Corporation's contribution format income statement for last month appears below:
$\begin{array} {| l | r | } 
\hline \text { Sales } & \$ 45,000 \
\hline \text { Less: variable expenses } & \underline { 27,000 } \
\hline \text { Contribution margin } & 18,000 \
\hline \text { Less: fixed expenses } & \underline { 12,000 } \
\hline \text { Operating income } & \$ 6,000 \
\hline
\end{array}$There were no beginning or ending inventories. The company produced and sold 3,000 units during the month

-The company has an opportunity to secure a special order of 800 units if it is willing to drop the selling price on these units to $13.Costs of securing the special order would be $1,000.The special order would not affect the company's regular sales.If the special order is accepted,what will be the impact on the company's overall operating income?

Accepted Answer

A)  Increase $3,200. 
B)  Increase $2,200. 
C)  Increase $3,800. 
D)  Remain the same. 
A)  Increase $3,200. 
B)  Increase $2,200. 
C)  Increase $3,800. 
D)  Remain the same.

Question 20

If sales are zero,the company's operating loss equals its fixed expenses.

Accepted Answer

A) True 
 B)False

When interpreting a CVP graph which of the following is NOT correct?

A company with sales of $80,000 and variable expenses of $40,000 should spend $12,000 on increased advertising,if the increased advertising will increase sales by $22,000. CM ratio = 50% so incremental CM = 22,000 *.5 which is less than $12,000.

If company A has a higher degree of operating leverage than company B,then which of the following statements is true?

The following is last month's contribution format income statement: Sales (12,000 units) \ 1,200,000 Less: variable expenses Contribution margin 500,000 Less: fixed expenses Operating income \ 200,000 What is the company's margin of safety percentage,rounded to the nearest whole percent?

The following information pertains to Rica Company: Sales (50,000 units) \ 1,000,000 Manufacturing costs: Variable 340,000 Fixed 70,000 Selling and admin. Expenses: Variable 10,000 Fixed 60,000 How much is Rica's break-even point?

The break-even point in units can be obtained by dividing total fixed expenses by the contribution margin ratio.

A company with a degree of operating leverage of 4 would expect income to increase by 200% if sales increased from $100,000 to $150,000. Increase in Sales is 50% so income increases 50%*4.

Last year,Black Company reported sales of $640,000,a contribution margin of $160,000,and an operating loss of $40,000.Based on this information,what was the break-even point?

If sales are zero,the company's operating loss equals its fixed expenses.

Managerial Accounting and the Business Environment

Cost Terms,concepts,and Classifications

Cost Behaviour: Analysis and Use

Systems Design: Job-Order Costing

Systems Design: Process Costing

Activity-Based Costing: A Tool to Aid Decision Making

Variable Costing: A Tool for Management

Budgeting

Standard Costs and Overhead Analysis

Reporting for Control

Relevant Costs for Decision Making

Capital Budgeting Decisions

Financial Statement Analysis

Filters

Exam 4: Cost-Volume-Profit Relationships

When interpreting a CVP graph which of the following is NOT correct?

A company with sales of $80,000 and variable expenses of $40,000 should spend $12,000 on increased advertising,if the increased advertising will increase sales by $22,000. CM ratio = 50% so incremental CM = 22,000 *.5 which is less than $12,000.

If company A has a higher degree of operating leverage than company B,then which of the following statements is true?

The following is last month's contribution format income statement: Sales (12,000 units) \ 1,200,000 Less: variable expenses Contribution margin 500,000 Less: fixed expenses Operating income \ 200,000 What is the company's margin of safety percentage,rounded to the nearest whole percent?

The following information pertains to Rica Company: Sales (50,000 units) \ 1,000,000 Manufacturing costs: Variable 340,000 Fixed 70,000 Selling and admin. Expenses: Variable 10,000 Fixed 60,000 How much is Rica's break-even point?

The break-even point in units can be obtained by dividing total fixed expenses by the contribution margin ratio.

A company with a degree of operating leverage of 4 would expect income to increase by 200% if sales increased from $100,000 to $150,000. Increase in Sales is 50% so income increases 50%*4.

Last year,Black Company reported sales of $640,000,a contribution margin of $160,000,and an operating loss of $40,000.Based on this information,what was the break-even point?

If sales are zero,the company's operating loss equals its fixed expenses.

Managerial Accounting and the Business Environment

Cost Terms,concepts,and Classifications

Cost Behaviour: Analysis and Use

Systems Design: Job-Order Costing

Systems Design: Process Costing

Activity-Based Costing: A Tool to Aid Decision Making

Variable Costing: A Tool for Management

Budgeting

Standard Costs and Overhead Analysis

Reporting for Control

Relevant Costs for Decision Making

Capital Budgeting Decisions

Financial Statement Analysis

Filters