Chapter 06 - Cost-Volume-Profit Relationships

Chapter 06
Cost-Volume-Profit Relationships
 

True / False Questions

 

5. The contribution margin ratio measures the effect on the total contribution margin of a
given change in total sales. 
True    False

 10. All other things equal, the margin of safety in a company with high fixed costs and low
variable costs will tend to be higher than the margin of safety in a similar company that has
low fixed costs and high variable costs. 
True    False
 
Multiple Choice Questions
 15. Which of the following is an assumption that is NOT made in most cost-volume-profit
calculations? 
A. Selling price, variable expense per unit, and fixed expense per unit do not change
throughout the relevant range.
B. There is no change in inventory levels.
C. In a multiproduct company, the sales mix does not change.
D. The selling price is constant. 

20. Assuming that the unit sales are unchanged, the total contribution margin will decrease if: 
A. fixed expenses increase.
B. fixed expenses decrease.
C. variable expense per unit increases.
D. variable expense per unit decreases.

25. Witczak Company has a single product and currently has a degree of operating leverage of
5. Which of the following will always increase Witczak's degree of operating leverage?

    
A. A
B. B
C. C
D. D
 
 

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30. A company has provided the following data:

   

If the dollar contribution margin per unit is increased by 10%, total fixed cost is decreased by
20%, and all other factors remain the same, net operating income will: 
A. increase by $61,000.
B. increase by $20,000.
C. increase by $3,500.
D. increase by $11,000.

 35. FilsonInc., a company that produces and sells a single product, has provided its
contribution format income statement for February.

   

If the company sells 9,700 units, its total contribution margin should be closest to: 
A. $252,200
B. $74,026
C. $247,000
D. $263,200
 

40. Fenestre Corporation's contribution margin ratio is 25%. The company's break-even is

80,000 units and the selling price of its only product is $4.00 a unit. What are the company's
fixed expenses? 
A. $80,000
B. $320,000
C. $20,000
D. $120,000

 
 
 

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45. Slosh Cleaning Corporation services both residential and commercial customers. Slosh
expects the following operating results next year for each type of customer:

   

Slosh expects to have $18,000 in fixed expenses next year. What would Slosh's total dollar
sales have to be next year in order to generate a profit of $90,000? 
A. $216,000
B. $250,000
C. $270,000
D. $300,000

 
 50. Riven Corporation has a single product whose selling price is $10. At an expected sales
level of $1,000,000, the company's variable expenses are $600,000 and its fixed expenses are
$300,000. The marketing manager has recommended that the selling price be increased by
20%, with an expected decrease of only 10% in unit sales. What would be the company's net
operating income if the marketing manager's recommendation is adopted? 
A. $132,000
B. $290,000
C. $180,000
D. $240,000
 
 55. VaccaroCorporation produces and sells a single product. Data concerning that product
appear below:

   

Fixed expenses are $293,000 per month. The company is currently selling 3,000 units per
month. Management is considering using a new component that would increase the unit
variable cost by $13. Since the new component would increase the features of the company's
product, the marketing manager predicts that monthly sales would increase by 400 units.
What should be the overall effect on the company's monthly net operating income of this
change? 
A. increase of $600
B. increase of $39,600
C. decrease of $600
D. decrease of $39,600
 

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60. Bear Publishing sells a nature guide. The following information was reported for a typical
month (sales volume is constant each month):

   

Bear is expecting a 20 cent increase in variable expenses. No other changes are expected or
planned. How much contribution margin should Bear expect after the increase? 
A. $7,700
B. $4,100
C. $9,900
D. Cannot be determined.

65. Witting Corporation produces and sells a single product. Data concerning that product
appear below:

   

The break-even in monthly unit sales is closest to: 

A. 2,523
B. 1,502
C. 3,337
D. 2,730

 
 70. Zents Inc. produces and sells a single product. The selling price of the product is $240.00
per unit and its variable cost is $108.00 per unit. The fixed expense is $407,880 per month.

The break-even in monthly dollar sales is closest to: 

A. $685,293
B. $741,600
C. $906,400
D. $407,880

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75. Data concerning Shanor Enterprises Corporation's single product appear below:

   

The unit sales to attain the company's monthly target profit of $13,000 is closest to: 
A. 2,245
B. 3,805
C. 5,475
D. 3,842
 
 

80. Knell Corporation sells a product for $230 per unit. The product's current sales are 33,000
units and its break-even sales are 26,400 units. The margin of safety as a percentage of sales is
closest to: 
A. 25%
B. 75%
C. 20%
D. 80%

 85. The January contribution format income statement of Steffel Corporation appears below:

   

The degree of operating leverage is closest to: 

A. 0.09
B. 11.34
C. 4.13
D. 0.24
 
90. A company currently sells products Aye, Bee, and Cee in equal quantities and at the same
selling price per unit. The contribution margin ratio for product Aye is 40%, for product Bee
is 50%, and the overall contribution margin ratio for the company is 48%. Suppose that the
sales mix changes to 40% Aye, 25% Bee, and 35% Cee, what would be the new overall
contribution margin ratio for the company? 
A. 27.5%
B. 45.3%
C. 47.4%
D. 68.4%

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The following is Addison Corporation's contribution format income statement for last month:

   

The company has no beginning or ending inventories. A total of 20,000 units were produced
and sold last month.
 

95. What is the company's contribution margin ratio? 

A. 250%
B. 150%
C. 70%
D. 30%

 100. What is the company's degree of operating leverage? 

A. 0.12
B. 2.5
C. 0.4
D. 3.3
 

 A tile manufacturer has supplied the following data:

   

 
 

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105. If the company increases its unit sales volume by 3% without increasing its fixed
expenses, then total net operating income should be closest to: 
A. $459,380
B. $453,667
C. $13,380
D. $482,660

Doubleday Corporation produces and sells a single product. The company has provided its
contribution format income statement for August.

   

 110. If
the company sells 3,500 units, its net operating income should be closest to: 
A. $33,000
B. $24,281
C. $22,200
D. $50,100
 
 Dorian Company produces and sells a single product. The product sells for $60 per unit and
has a contribution margin ratio of 40%. The company's monthly fixed expenses are $28,800.
 

115. The variable expense per unit is: 

A. $31.20
B. $24.00
C. $36.00
D. $28.80

 
 
  A manufacturer of tiling grout has supplied the following data:

   

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120. The company's contribution margin ratio is closest to: 

A. 28.9%
B. 63.9%
C. 71.1%
D. 36.1%
 
 
 Fletcher Company has three products with the following characteristics:

   
 
 

125. If total units sold remain unchanged, but the sales mix shifts more heavily toward
Product C, one would expect the overall contribution margin ratio to: 
A. increase
B. decrease
C. remain unchanged
D. none of these

 FinestraCorporation produces a single product that it currently sells for $10. Fixed expenses
are $120,000 for the year and variable expenses are $6 per unit. In addition, Finestra's
salespersons are paid a commission of 10% of their sales.
 

130. A customer has just approached Finestra to make a special, one-time purchase of 10,000
units. These units would not be sold by the salespeople, and therefore no commission would
have to be paid. The price Finestra would have to charge on this special order to earn an
additional profit of $40,000 is: 
A. $9.00 per unit
B. $10.00 per unit
C. $5.00 per unit
D. $11.20 per unit

 
 

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 Data concerning Sotero Corporation's single product appear below:

   

The company is currently selling 5,000 units per month. Fixed expenses are $319,000 per
month. Consider each of the following questions independently.

135. This question is to be considered independently of all other questions relating to Sotero

Corporation. Refer to the original data when answering this question.
Management is considering using a new component that would increase the unit variable cost
by $8. Since the new component would increase the features of the company's product, the
marketing manager predicts that monthly sales would increase by 500 units. What should be
the overall effect on the company's monthly net operating income of this change? 
A. increase of $2,000
B. decrease of $2,000
C. increase of $38,000
D. decrease of $38,000

 
Wertman Corporation produces and sells a single product with the following characteristics:

   

The company is currently selling 3,000 units per month. Fixed expenses are $215,000 per
month. Consider each of the following questions independently.
 
140. This question is to be considered independently of all other questions relating to
Wertman Corporation. Refer to the original data when answering this question.
The marketing manager believes that a $7,000 increase in the monthly advertising budget
would result in a 110 unit increase in monthly sales. What should be the overall effect on the
company's monthly net operating income of this change? 
A. decrease of $7,000
B. increase of $2,240
C. decrease of $2,240
D. increase of $9,240
 

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  Hurst Co. manufacturers and sells a single product. Price and cost data regarding this product
are as follows:

   
 
 145. In the current year, the company sold 43,000 units. Due to competition, management
will be forced to lower the selling price by 10% next year. How many units must be sold next
year to earn the same income as was earned in the current year? 
A. 50,000 units
B. 53,200 units
C. 58,800 units
D. 60,200 units
 
 

 Data concerning Hahl Corporation's single product appear below:

   

150. The break-even in monthly unit sales is closest to: 

A. 4,529
B. 3,470
C. 2,394
D. 7,724

  Pedaci Corporation produces and sells a single product. Data concerning that product appear
below:

   
 

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155. Assume the company's monthly target profit is $17,000. The dollar sales to attain that
target profit is closest to: 
A. $387,392
B. $635,069
C. $671,925
D. $993,313

 
  Rosner Corporation sells a product for $150 per unit. The product's current sales are 32,500
units and its break-even sales are 24,050 units.
 

160. What is the margin of safety in dollars? 

A. $4,875,000
B. $3,607,500
C. $3,250,000
D. $1,267,500

 
  Faust Corporation has provided its contribution format income statement for August.

   
 
 165. If the company's sales increase by 10%, its net operating income should increase by
about: 
A. 5%
B. 72%
C. 10%
D. 189%

  Hooper Corporation produces and sells two models of vacuum cleaners, Standard and
Deluxe. The company records show the following monthly data relating to these two
products:

   

The company's total monthly fixed cost is $15,000.

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170. The break-even in sales dollars for the expected sales mix is closest to: 
A. $160,772
B. $95,178
C. $109,091
D. $175,644

  BelloCorporation produces and sells two products. In the most recent month, Product D99P
had sales of $33,000 and variable expenses of $15,840. Product G71P had sales of $42,000
and variable expenses of $4,410. The fixed expenses of the entire company were $49,790.
 

175. If the sales mix were to shift toward Product D99P with total sales remaining constant,
the overall break-even point for the entire company: 
A. would not change.
B. would increase.
C. could increase or decrease.
D. would decrease.

 
 

Essay Questions
  180. Zins Corporation
produces and sells a single product. The company's contribution
format income statement for August appears below:

   

Required: Redo the company's contribution format income statement assuming that the
company sells 1,400 units. 

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 185. Themanagement of Reagon Corporation expects sales in January to be $122,000. The

company's contribution margin ratio is 69% and its fixed monthly expenses are $50,000.
Required: Estimate the company's net operating income for January, assuming that the fixed
monthly expenses do not change. Show your work! 

190. Data concerning Hillegass Corporation's single product appear below:

   

Fixed expenses are $502,000 per month. The company is currently selling 4,000 units per
month.
Required: Management is considering using a new component that would increase the unit
variable cost by $18. Since the new component would improve the company's product, the
marketing manager predicts that monthly sales would increase by 500 units. What should be
the overall effect on the company's monthly net operating income of this change if fixed
expenses are unaffected? Show your work! 

 
 

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 195. The following monthly budgeted data are available for the International Company:

   

Budgeted net operating income for the month is $220,000.

Required: a. Calculate the break-even dollar sales for the month.
b. Calculate the margin of safety.
c. Calculate the operating leverage. 

200. Yundt Corporation produces and sells a single product. Data concerning that product
appear below:

   

Required: Determine the monthly break-even in total dollar sales. Show your work! 

 205. The selling price of Garey Corporation's only product is $170.00 per unit and its variable
expense is $39.10 per unit. The company's monthly fixed expense is $641,410.
Required: Assume the company's monthly target profit is $65,450. Determine the unit sales to
attain that target profit. Show your work! 

 210. Logiudice Inc. has provided the following data concerning its only product:

   

Required: Compute the margin of safety in both dollars and as a percentage of sales. 

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 215. Camden Inc. produces and sells two products. During the most recent month, Product
M21B's sales were $35,000 and its variable expenses were $14,350. Product Y79X's sales
were $20,000 and its variable expenses were $7,650. The company's fixed expenses were
$30,820.
Required: a. Determine the overall break-even point for the company. Show your work!
b. If the sales mix shifts toward Product M21B with no change in total sales, what will happen
to the break-even point for the company? Explain. 

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