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Module 4

The document provides an overview of cost-volume-profit (CVP) analysis, including definitions of key terms like contribution margin and breakeven point. It also lists 25 multiple choice questions about assumptions and implications of CVP analysis, such as how changes in fixed costs, variable costs, or selling prices would affect the breakeven point. CVP analysis examines the relationships between sales, costs, and profits using classifications of costs as fixed or variable to determine profitability at different production volumes.

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Queenie Valle
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131 views3 pages

Module 4

The document provides an overview of cost-volume-profit (CVP) analysis, including definitions of key terms like contribution margin and breakeven point. It also lists 25 multiple choice questions about assumptions and implications of CVP analysis, such as how changes in fixed costs, variable costs, or selling prices would affect the breakeven point. CVP analysis examines the relationships between sales, costs, and profits using classifications of costs as fixed or variable to determine profitability at different production volumes.

Uploaded by

Queenie Valle
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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MODULE 4

COST-VOLUME-PROFIT ANALYSIS

THEORIES:
1. To which function of management is CVP analysis most applicable?
A. Planning C. Directing
B. Organizing D. Controlling Bobadilla

2. The systematic examination of the relationships among selling prices, volume of sales and production, costs,
and profits is termed:
A. contribution margin analysis C. budgetary analysis
B. cost-volume-profit analysis D. gross profit analysis Bobadilla

3. The term contribution margin is best defined as the:


A. difference between fixed costs and variable costs.
B. difference between revenue and fixed costs.
C. amount available to cover fixed costs and profit.
D. amount available to cover variable costs. Bobadilla

4. Cost-volume-profit analysis allows management to determine the relative profitability of a product by


A. Highlighting potential bottlenecks in the production process.
B. Determining the contribution margin per unit and projected profits at various levels of production.
C. Assigning costs to a product in a manner that maximizes the contribution margin.
D. Keeping fixed costs to an absolute minimum. Bobadilla

5. Cost-volume-profit analysis cannot be used if which of the following occurs?


A. Costs cannot be properly classified into fixed and variable costs.
B. The per unit variable costs change.
C. The total fixed costs change.
D. Per unit sales prices change. Bobadilla

6. The most useful information derived from a breakeven 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. Bobadilla

7. Which of the factors is (are) involved in studying cost-volume-profit relationships?


A. Levels of production C. Fixed costs
B. Variable costs D. All of these Bobadilla

8. At the breakeven point, fixed cost is always


A. Less than the contribution margin C. More than the contribution margin
B. Equal to the contribution margin. D. More than the variable cost Bobadilla

9. At the break-even point:


A. net income will increase by the unit contribution margin for each additional item sold above break-even.
B. the total contribution margin changes from negative to positive
C. fixed costs are greater than contribution margin
D. the contribution margin ratio begins to increase Bobadilla
10. In cost-volume-profit analysis, the greatest profit will be earned at
A. One hundred percent at normal productive capacity.
B. The production point with the lowest marginal cost.
C. The production point at which average total revenue exceeds average marginal cost.
D. The point at which marginal cost and marginal revenue are equal. Bobadilla

11. Which of the following is not an assumption underlying C-V-P analysis?


A. The behavior of total revenue is linear.
B. Unit variable expenses remain unchanged as activity varies.
C. Inventory levels at the beginning and end of the period are the same.
D. The number of units produced exceeds the number of units sold. Bobadilla

12. Which of the following assumptions is inherent to C-V-P analysis?


A. In manufacturing firms, the beginning and ending inventory levels are the same.
B. In a multi-product organization, the sales mix varies over time.
C. The behavior of total revenue is curvilinear.
D. he relevant range is not a consideration. Bobadilla

13. Which of the following assumptions is closely relevant to cost-volume-profit analysis?


A. for multiple product analysis, the sales mix is not important
B. inventory levels remain unchanged
C. total fixed costs and unit variable costs can be identified and remain constant over the relevant range
D. B and C Bobadilla

14. Advocates of cost-volume-profit analysis argue that:


A. Fixed costs are irrelevant for decision making.
B. Fixed costs are mandatory for CVP decision making.
C. Differentiation between the patterns of variable costs and fixed costs is critical.
D. Fixed costs are necessary to calculate inventory valuations. Bobadilla

15. With respect to fixed costs, C-V-P analysis assumes total fixed costs
A. per unit remains constant as volume changes
B. remain constant from one period to the next
C. vary directly with volume
D. remain constant across changes in volume Bobadilla

16. The CVP model assumes that over the relevant range of activity:
A. only revenues are linear. C. unit variable cost is not constant. Bobadilla
B. total fixed cost changes. D. revenues and total costs are linear.

17. Which of the following is not a limiting factor of Cost-Volume-Profit analysis?


A. The process assumes a linear relationship among the variables.
B. The process assumes variable costs per unit are available.
C. Efficiency is assumed to be constant.
D. Inventory levels are assumed to not change. Bobadilla

18. Cost-volume-profit analysis is a technique available to management to understand better the interrelationships of
several factors that affect a firm's profit. As with many such techniques, the accountant oversimplifies the real
world by making assumptions. Which of the following is not a major assumption underlying CVP analysis?
A. All costs incurred by a firm can be separated into their fixed and variable components.
B. The product’s selling price per unit is constant at all volume levels within a relevant range.
C. Operating efficiency and employee productivity is constant at all volume levels.
D. For multi-product situations, the sales mix can vary at different volume levels. Bobadilla

19. Pines Company has a higher degree of operating leverage than Tagaytay Company. Which of the following is
true?
A. Pines has higher variable expense.
B. Pines is more profitable than Tagaytay Company’s.
C. Pines is more risky than Tagaytay is.
D. Pines' profits are less sensitive to percentage changes in sales. Bobadilla

20. As projected net income increases the


A. degree of operating leverage declines. C. break-even point goes down. Bobadilla
B. margin of safety stays constant. D. contribution margin ratio goes up.

21. Given the following notations, what is the breakeven sales level in units?
SP = selling price per unit
FC = total fixed cost
VC = variable cost per unit
A. SP / (FC/VC) C. VC/(SP – FC)
B. FC/(VC/SP) D. FC/(SP – VC) Bobadilla

22. A company increased the selling price for its product from P1.00 to P1.10 a unit when total fixed costs increased
from P400,000 to P480,000 and variable cost per unit remained unchanged. How would these changes affect
the breakeven point?
A. The breakeven point in units would be increased.
B. The breakeven point in units would be decreased.
C. The breakeven point in units would remain unchanged.
D. The effect cannot be determined from the information given. Bobadilla

23. On January 1, 2007, Incremental Company increased its direct labor wage rates. All other budgeted costs and
revenues were unchanged. How did this increase affect Incremental Company’s budgeted break-even point and
budgeted margin of safety?
Bobadilla A. B. C. D.
Budgeted Break-even Point Increase Increase Decrease Decrease
Expected Margin of Safety Increase Decrease Decrease Increase

24. As the variable cost increases but the selling price remains constant, the
A. Degree of operating leverage declines C. Breakeven point goes down Bobadilla
B. Margin of safety stays constant D. Contribution margin ratio goes up

25. A very high degree of operating leverage (DOL) indicates that a firm:
A. has high fixed costs. C. has high variable costs. Bobadilla
B. has a high net income. D. is operating close to its breakeven point.

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