ANS: B

Bolton Company

Below is an income statement for Bolton Company:

Sales $400,000
Variable costs (125,000)
Contribution margin $275,000
Fixed costs (200,000)
Profit before taxes $ 75,000

27. Refer to Bolton Company. What is Boltons degree of operating leverage?

a. 3.67
b. 5.33
c. 1.45
d. 2.67

ANS: A
$(275,000/75,000) =
3.67

28. Refer to Bolton Company. Based on the cost and revenue structure on the income
statement, what was Boltons break-even point in dollars?
a. $200,000
b. $325,000
c. $300,000
d. $290,909

ANS: D
CM Percentage = $(275/400) = .6875
.6875x - $800,000 = 0
x = $290,909

29. Refer to Bolton Company. What was Boltons margin of safety?

a. $200,000
b. $75,000
c. $100,000
d. $109,091
ANS: D

Margin of Safety = $(400,000 - 290,909)

= $109,091

30. Refer to Bolton Company. Assuming that the fixed costs are expected to remain
at $200,000 for the coming year and the sales price per unit and variable costs per unit are also
expected to remain constant, how much profit before taxes will be produced if the company
anticipates sales for the coming year rising to 130 percent of the current years level?
a. $97,500
b. $195,000
c. $157,500
d. A prediction cannot be made from the information given.

ANS: C
Contribution Margin * 1.30 = New Contribution Margin
$275,000 * 1.30 = $357,500

Contribution Margin - Fixed Costs = Profit

$(357,500 - 200,000) = $157,500

Value Pro

Value Pro produces and sells a single product. Information on its costs follow:

Variable costs:
SG&A $2 per unit
Production $4 per unit
Fixed costs:
SG&A $12,000 per year
Production $15,000 per year

31. Refer to Value Pro. Assume Value Pro produced and sold 5,000 units. At this level
of activity, it produced a profit of $18,000. What was Value Pro's sales price per unit?
a. $15.00
b. $11.40
c. $9.60
d. $10.00

ANS: A
Profit + Fixed Costs = Contribution Margin
$18,000 + $27,000 = $45,000
 $45,000 / 5,000 units = $9 contribution margin per unit

Contribution Margin + Variable Costs = Sales Price/Unit

$(9 + (4 + 2)) = $15/Unit

32. Refer to Value Pro. In the upcoming year, Value Pro estimates that it will produce
and sell 4,000 units. The variable costs per unit and the total fixed costs are expected to be the
same as in the current year. However, it anticipates a sales price of $16 per unit. What is Value
Pro's projected margin of safety for the coming year?
a. $7,000
b. $20,800
c. $18,400
d. $13,000

ANS: B
Profit at 4,000 units
Gross Sales = $16 * 4,000 units = $64,000
Contribution Margin = $(16 - 6) = $10/unit
($10*4,000) - $27,000 = $(40,000 - 27,000) = $13,000

Breakeven
0.625x - $27,000 = $0
x = $43,200

$(64,000 - 43,200) = $20,800

33. Meixner Manufacturing incurs annual fixed costs of $250,000 in producing and
selling a single product. Estimated unit sales are 125,000. An after-tax income of $75,000 is
desired by management. The company projects its income tax rate at 40 percent. What is the
maximum amount that Meixner can expend for variable costs per unit and still meet its profit
objective if the sales price per unit is estimated at $6?
a. $3.37
b. $3.59
c. $3.00
d. $3.70

ANS: C
Before Tax Income: $75,000 / 0.60 = $125,000
Fixed Costs: 250,000
Contribution Margin: $375,000

Projected Sales $750,000

 less: Contribution Margin 375,000
Variable Costs $375,000

$375,000 / 125,000 units $3/unit

Jarvis Company

The following information relates to financial projections of Jarvis Company:

Projected sales 60,000 units

Projected variable costs $2.00 per unit
Projected fixed costs $50,000 per year
Projected unit sales price $7.00

34. Refer to Jarvis Company. How many units would Jarvis Company need to sell to
earn a profit before taxes of $10,000?
a. 25,714
b. 10,000
c. 8,571
d. 12,000

ANS: D
Contribution Margin per
Unit: $5
$5x = $50,000 + $10,000
$5x = $60,000
x = 12,000 units

35. Refer to Jarvis Company. If Jarvis Company achieves its projections, what will be
its degree of operating leverage?
a. 6.00
b. 1.20
c. 1.68
d. 2.40

ANS: B
Net profit = (60,000 units * $5/unit) - $50,000
= $300,000 - $50,000
= $250,000
DOL = $(300,000/250,000) = 1.20
 36. Unique Company manufactures a single product. In the prior year, the company
had sales of $90,000, variable costs of $50,000, and fixed costs of $30,000. Unique expects its
cost structure and sales price per unit to remain the same in the current year, however total sales
are expected to increase by 20 percent. If the current year projections are realized, net income
should exceed the prior years net income by:
a. 100 percent.
b. 80 percent.
c. 20 percent.
d. 50 percent.

ANS: B
Contribution margin: $40,000
Net profit: $(40,000 - 30,000) = $10,000

20% CM increase: $40,000 * 1.20 = $48,000

Net profit: $(48,000 - 30,000) = $18,000

Increase in profit $8,000

$8,000/$10,000 = 80%

Electra Corporation

Electra Corporation manufactures and sells two products: A and B. The operating results of the
company are as follows:

Product A Product B
Sales in units 2,000 3,000
Sales price per unit $10 $5
Variable costs per unit 7 3

In addition, the company incurred total fixed costs in the amount of $9,000.

37. Refer to Electra Corporation.. How many total units would the company have
needed to sell to break even?
a. 3,750
b. 750
c. 3,600
d. 1,800

ANS: A
Let B = 1.5A

3A + 2(1.5A) - $9,000 = $0
 6A - $9,000 = $0
A = 1,500
B = 2,250

Total units = 3,750

38. Refer to Electra Corporation. If the company would have sold a total of 6,000
units, consistent with CVP assumptions how many of those units would you expect to be Product
B?
a. 3,000
b. 4,000
c. 3,600
d. 3,500

ANS: C
A + 1.5A = 6,000 units
2.5A = 6,000 units
A = 2,400 units
B = 3,600 units

39. Refer to Electra Corporation. How many units would the company have needed
to sell to produce a profit of $12,000?
a. 8,750
b. 20,000
c. 10,000
d. 8,400

ANS: A
3A + 2(1.5A) - $9,000 = $12,000
6A = $21,000
A = 3,500 units
B = 5,250 units
Total = 8,750 units

Tori Spelling Company

Below is an income statement for Tori Spelling Company:

Sales $300,000
Variable costs (150,000)
 Contribution margin $150,000
Fixed costs (100,000)
Profit before taxes $ 50,000

40. Refer to Tori Spelling Company. What was the company's margin of safety?
a. $50,000
b. $100,000
c. $150,000
d. $25,000

ANS: B
Margin of safety = Sales - BEP
Sales
CM = .50
BEP Sales = .50x - $100,000 = 0
= .50x = $100,000
x = $200,000
$(300,000 - 200,000) = $100,000

41. Refer to Tori Spelling Company. If the unit sales price for Tori Spellings sole
product was $10, how many units would it have needed to sell to produce a profit of $40,000?
a. 27,500
b. 29,000
c. 28,000
d. can't be determined from the information given

ANS: C
Contribution Margin at $40,000 profit: $(40,000 + 100,000) =
$140,000
Contribution Margin Ratio: 0.50
$140,000 / .50 = $280,000
$280,000 / $10 = 28,000 units

42. A firm estimates that it will sell 100,000 units of its sole product in the coming
period. It projects the sales price at $40 per unit, the CM ratio at 60 percent, and profit at $500,000.
What is the firm budgeting for fixed costs in the coming period?
a. $1,600,000
b. $2,400,000
c. $1,100,000
d. $1,900,000
ANS: D
Profit + Fixed Cost = (100,000 units * $60/unit CM)
Fixed Cost = (100,000 units * $24/unit CM) - Profit
= $2,400,000 - $500,000
= $1,900,000

43. Sombrero Company manufactures a western-style hat that sells for $10 per unit.
This is its sole product and it has projected the break-even point at 50,000 units in the coming
period. If fixed costs are projected at $100,000, what is the projected contribution margin ratio?
a. 80 percent
b. 20 percent
c. 40 percent
d. 60 percent

ANS: B
Fixed Costs=Contribution Margin at Breakeven
Point
= $100,000
Breakeven Sales: $500,000
CM Ratio: $(100,000/500,000) = 20%

Camryn Company

Camryn Company manufactures a single product. Each unit sells for $15. The firm's projected
costs are listed below:

Variable costs per unit:

Production $5
SG&A $1
Fixed costs:
Production $40,000
SG&A $60,000
Estimated volume 20,000
units

44. Refer to Camryn Company. What is Camryn's projected margin of safety for the
current year?
a. $133,333
b. $150,000
c. $80,000
d. $100,000
ANS: A
Contribution Margin = $9/unit
Contribution Margin Ratio = 60%
Breakeven Point = $100,000/.60 = $166,667
Sales Volume = 20,000 units * $15/unit = $300,000
Margin of Safety = $(300,000 - 166,667) =
$133,333

45. Refer to Camryn Company. What is Camryn's projected degree of operating

leverage for the current year?
a. 2.25
b. 1.80
c. 3.75
d. 1.67

ANS: A
Contribution Margin = $180,000
Net Income = 80,000
Degree of Operating Leverage = $180,000/80,000 =
2.55

Alpha, Beta, and Epsilon Companies

Below are income statements that apply to three companies: Alpha, Beta, and Epsilon:

Alpha Co. Beta Co. Epsilon Co.

Sales $100 $100 $100
Variable costs (10) (20) (30)
Contribution margin $ 90 $ 80 $ 70
Fixed costs (30) (20) (10)
Profit before taxes $ 60 $ 60 $ 60

46. Refer to Alpha, Beta, and Epsilon Companies. Within the relevant range, if sales
go up by $1 for each firm, which firm will experience the greatest increase in profit?
a. Alpha Company
b. Beta Company
c. Epsilon Company
d. can't be determined from the information given

ANS: A
Alpha Company will have the greatest increase in profit, because it has the
greatest contribution margin per unit.
 47. Refer to Alpha, Beta, and Epsilon Companies. Within the relevant range, if sales
go up by one unit for each firm, which firm will experience the greatest increase in net income?
a. Alpha Company
b. Beta Company
c. Epsilon Company
d. can't be determined from the information given

ANS: D
Price per unit is not given.

48. Refer to Alpha, Beta, and Epsilon Companies. At sales of $100, which firm has
the highest margin of safety?
a. Alpha Company
b. Beta Company
c. Epsilon Company
d. They all have the same margin of safety.

ANS: C
Epsilon Company has the lowest amount of fixed costs to be covered.

49. Roy is interested in entering the catfish farming business. He estimates if he

enters this business, his fixed costs would be $50,000 per year and his variable costs would equal
30 percent of sales. If each catfish sells for $2, how many catfish would Roy need to sell to
generate a profit that is equal to 10 percent of sales?
a. 40,000
b. 41,667
c. 35,000
d. No level of sales can generate a 10 percent net return on sales.

ANS: B
Let x = sales in dollars
x - .30x - $50,000 = .10x
.60x = $50,000
x = $83,333 Units = $83,333/$2 per unit = 41,667
units
 50. The following information pertains to Neptune Companys cost-volume-profit
relationships:

Break-even point in units sold 1,000

Variable costs per unit $500
Total fixed costs $150,000

How much will be contributed to profit before taxes by the 1,001st unit sold?
a. $650
b. $500
c. $150
d. $0

ANS: C
Fixed Cost = Contribution Margin
= $150,000
Contribution Margin/Unit = Contribution Margin/Units
$150,000/1,000 units = $150/unit

51. Information concerning Allison Corporation's Product A follows:

Sales $300,000
Variable costs 240,000
Fixed costs 40,000

Assuming that Allison increased sales of Product A by 20 percent, what should the profit from
Product A be?
a. $20,000
b. $24,000
c. $32,000
d. $80,000

ANS: C
Contribution margin at $300,000 in sales = $60,000
Increase contribution margin by 20% = $60,000 * 1.20 =
$72,000
Contribution margin - fixed costs = Profit
$(72,000 - 40,000) = $32,000

52. Lynch Company reported the following results from sales of 5,000 units of Product
A for June:
 Sales $200,000
Variable costs (120,000)
Fixed costs (60,000)
Operating income $ 20,000

Assume that Lynch increases the selling price of Product A by 10 percent in July. How many units
of Product A would have to be sold in July to generate an operating income of $20,000?
a. 4,000
b. 4,300
c. 4,545
d. 5,000

ANS: C
If sales price per unit is increased by 10 percent, less units will have to be sold to
generate gross revenues of $200,000.
Sales price per unit = $200,000/5,000 units = $40/unit
$40/unit * 1.10 = $44/unit
$(200,000 / 44/unit) = 4,545 units

53. On a break-even chart, the break-even point is located at the point where the total
a. revenue line crosses the total fixed cost line.
b. revenue line crosses the total contribution margin line.
c. fixed cost line intersects the total variable cost line.
d. revenue line crosses the total cost line.

ANS: D

54. In a CVP graph, the slope of the total revenue line indicates the
a. rate at which profit changes as volume changes.
b. rate at which the contribution margin changes as volume changes.
c. ratio of increase of total fixed costs.
d. total costs per unit.

ANS: B

55. In a CVP graph, the area between the total cost line and the total revenue line
represents total
a. contribution margin.
b. variable costs.
c. fixed costs.
d. profit.

ANS: D
 56. In a CVP graph, the area between the total cost line and the total fixed cost line
yields the
a. fixed costs per unit.
b. total variable costs.
c. profit.
d. contribution margin.

ANS: B

57. If a company's fixed costs were to increase, the effect on a profit-volume graph
would be that the
a. contribution margin line would shift upward parallel to the present line.
b. contribution margin line would shift downward parallel to the present line.
c. slope of the contribution margin line would be more pronounced (steeper).
d. slope of the contribution margin line would be less pronounced (flatter).

ANS: B

58. If a company's variable costs per unit were to increase but its unit selling price
stays constant, the effect on a profit-volume graph would be that the
a. contribution margin line would shift upward parallel to the present line.
b. contribution margin line would shift downward parallel to the present line.
c. slope of the contribution margin line would be pronounced (steeper).
d. slope of the contribution margin line would be less pronounced (flatter).

ANS: D

59. The most useful information derived from a cost-volume-profit chart is the
a. amount of sales revenue needed to cover enterprise variable costs.
b. amount of sales revenue needed to cover enterprise fixed costs.
c. relationship among revenues, variable costs, and fixed costs at various levels of
activity.
d. volume or output level at which the enterprise breaks even