Multiple Choice
c 2. Which formula gives the sales dollars required to earn a target profit?
(P = selling price, V = variable cost per unit, F = total fixed costs,
T = target profit)
a. F/[(P - V)/P]
b. (F + T)/(P)
c. (F + T)/[(P - V)/P]
d. F + T/V
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c 8. If all goes according to plan except that unit variable cost falls,
a. total contribution margin will be lower than expected.
b. the contribution margin percentage will be lower than expected.
c. profit will be higher than expected.
d. per-unit contribution margin will be lower than expected.
a 9. If all goes according to plan except that total fixed costs rise,
a. income will be lower than expected.
b. total contribution margin will be lower than expected.
c. total sales will be lower than expected.
d. income will be higher than expected.
a 10. Which of the following decreases per-unit contribution margin the most
for a company currently earning a profit?
a. A 10% decrease in selling price.
b. A 10% increase in variable cost per unit.
c. A 10% increase in fixed costs.
d. A 10% increase in fixed cost per unit.
a 15. If selling price, per-unit variable cost, and total fixed costs are
constant,
a. the break-even point in units remains constant.
b. profit per unit remains constant for all levels of volume within the
relevant range.
c. total variable costs equal total fixed costs.
d. total contribution margin equals total fixed costs.
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b 16. XYZ Company desires a profit of $120,000 and expects to sell 20,000
units. Variable cost per unit is $15 and total fixed costs are
$160,000. The selling price must be
a. $40.
b. $30.
c. $26.
d. $20.
a 17. Contribution margin percentage is 30% and contribution margin per unit
is $12. Which of the following is true?
a. Variable cost per unit is $28.
b. Return on sales is 12%.
c. Selling price is $48.
d. Variable cost percentage is 12%.
a 19. TRS Company changed production methods, increasing fixed costs and
decreasing its per-unit variable costs. The change
a. increases risk and increases potential profit.
b. increases risk and decreases potential profit.
c. decreases risk and decreases potential profit.
d. decreases risk and increases potential profit.
d 21. Selling price is $100, unit variable cost is $68, and fixed costs are
$400,000. Unit sales required to earn a $120,000 profit are
a. 5,200
b. 7,647
c. 13,700
d. 16,250
c 22. The tax rate is 40%. A company that wants a profit of $120,000 after
taxes must earn how much before taxes?
a. $ 48,000.
b. $ 72,000.
c. $200,000.
d. $300,000.
a 23. Genco Company has a 30% contribution margin percentage and fixed costs
of $30,000. To earn a 10% return on sales, Genco must have sales of
a. $150,000.
b. $100,000.
c. $40,000.
d. an amount that cannot be determined without more information.
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a 24. If a company is earning a profit, its fixed costs
a. are less than total contribution margin.
b. are equal to total contribution margin.
c. are greater than total variable costs.
d. can be greater than or less than total contribution margin.
a 30. A fixed cost is the same percentage of sales in three different months.
Which of the following is true?
a. The company had the same sales in each of those months.
b. The cost is both fixed and variable.
c. The company is operating at its break-even point.
d. The company is achieving its target level of profit.
a 32. If the sales mix shifts toward higher contribution margin products, the
break-even point
a. decreases.
b. increases.
c. remains constant.
d. it is impossible to tell without more information.
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a 33. In the following graph, revenue is represented by
A
| * D
| * *
| * *
| * *
| * *
| *
| * *
| * *
| * *
B|*__________*___________________________________ C
| *
| *
| *
| *
|*______________________________________________
O E
c 34. In the following graph, the vertical distance between the lines OA and
BD represents
| A D
| * *
| * *
| * *
| * *
| *
| * *
| * *
| * *
B|*__________* __________________________________ C
| *
| *
| *
| *
|*______________________________________________
O E
a. revenue.
b. total variable cost.
c. profit or loss.
d. total contribution margin.
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d 35. In the following graph, total variable costs are represented by
A
| * D
| * *
| * *
| * *
| * *
| *
| * *
| * *
| * *
B|*__________* __________________________________ C
| *
| *
| *
| *
|*______________________________________________
O E
c 37. The break-even point in units equals total fixed costs divided by
a. selling price per unit.
b. variable cost per unit.
c. contribution margin per unit.
d. contribution margin percentage.
d 38. The break-even point in dollars equals total fixed costs divided by
a. selling price per unit.
b. variable cost as a percentage of selling price.
c. contribution margin per unit.
d. contribution margin percentage.
c 39. Company A has a lower variable cost per unit and higher total fixed
costs than Company B. The selling prices of their products are the
same. Sales fluctuate considerably for both companies. Therefore,
a. Company A has a lower break-even point than Company B.
b. Company A earns more profit than Company B.
c. Company A is more risky than Company B.
d. Company A has a lower contribution margin percentage than Company B.
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a. earns the same profit under different operating schemes.
b. earns no profit.
c. earns its target profit.
d. any of the above.
d 42. Selling price is $40, unit variable cost is $24, and fixed costs are
$400,000. Unit sales required to break even are
a. 10,000.
b. 12,500.
c. 16,667.
d. 25,000.
d 43. ABC's variable costs are 60% of total revenue. If fixed costs are
$300,000, what is the break-even sales volume?
a. $120,000
b. $180,000
c. $500,00
d. $750,000
b 44. Acme has sales of $200,000, fixed costs of $100,000, and a profit of
$20,000. What is Acme's margin of safety?
a. $ 20,000
b. $ 33,333
c. $100,000
d. An amount that cannot be determined without more information.
b 45. Machine A has fixed costs of $450,000 and a variable cost of $20.
Machine B has fixed costs of $600,000 and a variable cost of $14. What
is the indifference point, in units?
a. 22,500
b. 25,000
c. 42,858
d. An amount that cannot be determined without more information.
d 46. DJH Company has sales of $360,000, variable costs of $216,000, and
fixed costs of $150,000. To earn a 10% return on sales, DJH must have
sales of
a. $375,000.
b. $440,000.
c. $470,000.
d. $500,000.
b 47. DJH Company has sales of $400,000, variable costs of $240,000, and
fixed costs of $150,000. What is the break-even sales volume?
a. $150,000
b. $375,000
c. $390,000
d. $550,000
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a 48. Alvarez Inc. sells three products with the following results:
X Y Z
------ ------ ------
Sales $10,000 $20,000 $30,000
Variable costs 4,000 12,000 15,000
d 50. Samson Inc. has a contribution margin percentage of 35%. If fixed costs
are $630,000, what is the break-even point?
a. $ 220,500
b. $ 409,500
c. $ 969,231
d. $1,800,000
True-False
T 6. As unit sales increase, both average total cost and fixed cost per unit
decrease.
Problems
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1. Foris Company's product sells for $16 and has a variable cost per unit of
$12. Fixed costs are $120,000.
b. Compute the number of units Foris must sell to earn a $30,000 profit.
c. Foris has a target profit of $36,000 and expects to sell 30,000 units.
Compute the selling price Foris must charge to earn the target profit.
d. Foris wants to keep its selling price at $8 per unit and earn a 10%
return on sales. Calculate the number of units Foris must sell to meet
the target.
SOLUTION:
2. Dennis Company sells a product for $20, variable costs are $8 per unit,
and fixed costs are $32,000.
b. Find the selling price that Dennis must charge to earn an $8,000 profit
selling 1,600 units.
SOLUTION:
a. 2,667 ($32,000/$12)
b. $33.00
Profit = Sales - Variable Costs - Fixed Costs
$8,000 = 1,600X - $8 x 1,600 - $32,000
1,600X = $52,800
X = $33.00
c. 1,250 units
Current Costs = Proposed Costs
$32,000 + $8Q = $34,000 + $6.40Q
Q = 1,250
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3. Stout Company sells three products. Planned results for next year follow.
Product
A B C
---- ---- ----
Selling price $10 $ 8 $ 4
Variable cost 4 6 1
--- --- ---
Contribution margin $ 6 $ 2 $ 3
=== === ===
Sales mix in dollars 25% 25% 50%
c. Suppose now that the sales mix, in UNITS, is 25%, 25%, 50%. Determine
the weighted-average contribution-margin per unit.
SOLUTION:
a. 58.75%
A B C Total
--- --- --- -----
Contribution margin percentage 60% 25% 75%
Sales mix in dollars 25% 25% 50%
--- --- ---
Weighted-average 15% + 6.25% + 37.5% = 58.75%
c. $3.50
A B C Total
--- --- --- -----
Contribution margin per unit $6.00 $2.00 $3.00
Sales mix in units 25% 25% 50%
----- ----- -----
Weighted-average $1.50 + $0.50 + $1.50 = $3.50
4. Maple Company has sales of $550,000 and has variable costs of $330,000.
Fixed costs are $180,000.
c. Compute the sales Maple would need to earn a 10% return on sales.
SOLUTION:
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a. $450,000 ($180,000/40% = $450,000)
[CM% = ($550,000 - $330,000)/$550,000 = 40%]
5. Acme Company's product sells for $80 and has a variable cost per unit of
$60. Fixed costs are $400,000.
b. Compute the number of units must Acme sell to earn a $100,000 profit.
c. Acme has a target profit of $152,000 and expects to sell 30,000 units.
Compute the selling price Acme must charge to earn the target profit.
d. Acme wants to keep its selling price at $40 per unit and earn a 10%
return on sales. Calculate the number of units Acme must sell to meet
the target.
SOLUTION:
6. Craik Company sells a product for $25, variable costs are 12 per unit, and
fixed costs are $180,000.
b. Find the selling price that Craik must charge to earn a $40,000 profit
selling 16,000 units.
SOLUTION:
a. 13,846 ($180,000/$13)
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b. $25.75
Profit = Sales - Variable Costs - Fixed Costs
$40,000 = 16,000X - $12 x 16,000 - $180,000
16,000X = $412,000
X = $25.75
c. 10,000 units
Current Costs = Proposed Costs
$180,000 + $12Q = $200,000 + $10Q
Q = 10,000
SOLUTION:
b. 64%
$728,000 - $600,000
-------------------- = 64%
$800,000 - $600,000
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SOLUTION:
a. $3.70
A B C Total
--- --- --- -----
Units sold 10,000 + 20,000 + 70,000 = 100,000
Mix in units 10% 20% 70%
b. 54,054 ($200,000/$3.70)
9. Oak Grove Inc's product sells for $32 and has a variable cost per unit of
$20. Fixed costs are $120,000. The effective tax rate is 40%.
b. Compute the number of units Oak Grove must sell to earn a $30,000
after-tax profit.
c. Oak Grove has an after-tax target profit of $36,000 and expects to sell
20,000 units. Compute the selling price Oak Grove must charge to earn
the target profit.
SOLUTION:
a. 10,000 ($120,000/12)
10. Eleva Company has sales of $350,000, variable costs of $200,000, and
fixed costs of $125,000. Eleva has an effective tax rate of 40%.
c. Compute the sales Eleva would need to earn a 15% after-tax return on
sales.
SOLUTION:
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before-tax return on sales = 15%/60% = 25%
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