ACCOUNTING 202 STRATEGIC BUSINESS ANALYSIS

COST-VOLUME-PROFIT ANALYSIS
QUIZ
I. Theories.

1. 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

2. 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.

3. 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.

4. 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.

5. 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

6. 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

7. 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)

8. On January 1, 2020, 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?
A. B. C. D.
Budgeted Break-even Point Increase Increase Decrease Decrease
Expected Margin of Safety Increase Decrease Decrease Increase

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 9. Which of the following best describes the impact of selling more units?
A. The increase in sales volume increases total variable cost.
B. The increase in sales volume means an increase in total fixed cost.
C. The increase in sales increases contribution margin, causing net income to decrease.
D. The increase in sales increases contribution margin per unit causing the break-even point to
decrease.

10. On a cost-volume-profit chart (break-even graph), where are the total fixed costs shown?
A. As the point where the sales line intersects the vertical axis (pesos)
B. As the point where the sales line crosses the total cost line
C. As the point where the sales line crosses the horizontal axis (volume)
D. As the point where the total cost line intersects the vertical axis (pesos)

11. Classifying a cost as fixed or variable depends on how it behaves

A. per unit, as the volume of activity changes.
B. in total, as the volume of activity changes.
C. both A and B are correct.
D. none of the above.

12. A relatively low margin of safety ratio for a product is usually an indication that the product:
A. is losing money
B. has a high contribution margin
C. is riskier than higher margin of safety products
D. is less risky than higher margin of safety products

13. As fixed costs for a firm rise, all other things held constant, the breakeven point will
A. be unchanged C. increase
B. not be affected by fixed costs D. decrease

14. The most likely strategy to reduce the breakeven point would be to
A. Increase both the fixed costs and the contribution margin.
B. Decrease both the fixed costs and the contribution margin.
C. Decrease the fixed costs and increase the contribution margin.
D. Increase the fixed costs and decrease the contribution margin.

15. Which of the following best describes the impact of an increase in fixed cost?
A. The increase in fixed cost will result in an increase in selling more units.
B. The increase in fixed cost will cause an increase in variable cost.
C. The increase in fixed cost causes net income to decrease and the break-even point to decrease.
D. The increase in fixed cost causes net income to decrease and the break-even point to increase.

16. The following diagram is a cost-volume-profit graph for a manufacturing company.

P
C
D

A B

O
Volume
The difference between line AB and line AC (area BAC) is the
A. contribution ratio. C. total variable cost.
B. contribution margin per unit. D. total fixed cost.

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17. Select the answer that best describes the labeled item on the diagram.
A. Area CDE represents the area of net loss.
B. Line AC graphs total fixed costs.
C. Point D represents the point at which the contribution margin per unit increases.
D. Line AC graphs total costs.

18. In a cost-volume-profit graph

A. the total revenue line crosses the horizontal axis at the breakeven point.
B. beyond the breakeven sales volume, profits are maximized at the sales volume where total
revenues equal total costs.
C. an increase in unit variable costs would decrease the slope of the total cost line.
D. an increase in the unit selling price would shift the breakeven point in units to the left.

19. Management is considering replacing an existing sales commission compensation plan with a fixed
salary plan. If the change is adopted, the company's
A. break-even point must increase.
B. margin of safety must decrease.
C. operating leverage must increase.
D. profit must increase.

20. As projected net income increases the

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

21. A managerial preference for a very low degree of operating leverage might indicate that
A. an increase in sales volume is expected.
B. a decrease in sales volume is expected.
C. the firm is very unprofitable.
D. the firm has very high fixed costs.

II. Problem-Solving.

1. Green Corporation expects to sell 3,000 plants a month. Its operations manager estimated the
following monthly costs:
Variable costs P 7,500
Fixed costs 15,000
What sales price per plant does she need to achieve to begin making a profit if she sells the estimated
number of plants per month?
A. P7.51 C. P5.00
B. P7.50 D. P2.50

2. The Red Lions Brotherhood is planning its annual Riverboat Extravaganza. The Extravaganza
committee has assembled the following expected costs for the event:
Dinner per person P 70
Programs and souvenir per person 30
Orchestra 15,000
Tickets and advertising 7,000
Riverboat rental 48,000
Floor show and strolling entertainment 10,000
The committee members would like to charge P300 per person for the evening’s activities.
Assume that only 250 persons are expected to attend the extravaganza, what ticket price must be
charged to breakeven?
A. P420 C. P320
B. P350 D. P390

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 3. Carribean Company produces a product that sells for P60. The variable manufacturing costs are P30
per unit. The fixed manufacturing cost is P10 per unit based on the current level of activity, and fixed
selling and administrative costs are P8 per unit. A selling commission of 10% of the selling price is paid
on each unit sold.
The contribution margin per unit is:
A. P24. C. P30.
B. P36. D. P54.

4. At a break-even point of 5,000 units sold, variable expenses were P10,000 and fixed expenses were
P50,000. The profit from the 5,001st unit would be?
A. P10 C. P15
B. P50 D. P12

5. The Hard Company sells widgets. The company breaks even at an annual sales volume of 80,000 units.
At an annual sales volume of 100,000 units the company reports a profit of P220,000. The annual
fixed costs for the Hard Company are:
A. P 880,000 C. P 800,000
B. P1,100,000 D. P1,000,000

6. An entity has fixed costs of P200,000 and variable costs per unit of P6. It plans on selling 40,000 units
in the coming year. If the entity pays income taxes on its income at a rate of 40%, what sales price
must the firm use to obtain an after-tax profit of P24,000 on the 40,000 units?
A. P11.60 C. P12.00
B. P11.36 D. P12.50

7. Bulusan Company has sales of P400,000 with variable costs of P300,000, fixed costs of P120,000, and
an operating loss of P20,000. How much increase in sales would Bulusan need to make in order to
achieve a target operating income of 10% of sales?
A. P400,000 C. P500,000
B. P462,000 D. P800,000

8. Marsman Company had a margin of safety ratio of 20%, variable costs of 60% of sales, fixed costs of
P240,000, a break-even point of P600,000, and an operating income of P60,000 for the current year.
What are the current year's sales?
A. P 500,000 C. P 750,000
B. P 600,000 D. P 900,000

Items 9 and 10 are based on the following information.

The data below pertain to two types of products manufactured by Korn Corporation:
Per Unit
Sales price Variable costs
Product Y P 120 P70
Product Z 500 200
Fixed costs total P300,000 annually. The expected mix in units is 60% for product Y and 40% for
product

9. How much is Korn’s breakeven sales in units?

A. 857 C. 2,000
B. 1,111 D. 2,400

10. How much is Korn’s breakeven sales in pesos?

A. P300,000 C. P475,000
B. P420,000 D. P544,000

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 Chemicals, Inc. formulates and sells three major chemicals: C1, C2, and C3. It sells to industrial users
who use and buy these chemicals in the following ratio: these (3) measures of C1 for one (1) measure
of C3, two (2) of C2 for one(1) measure of C1. The company makes the following contribution margin
per measure:
C1 P30
C2 P45
C3 P90
11. Fixed costs amounted to 1.8 million. At break-even point, the volume of C3 to be sold would be
A. 12,000 C. 24,000
D. 4,000
B. 36,000

Items 12 and 13 are based on the following information.

A company sells two products, X and Y. The sales mix consists of a composite unit of two units of X for
every five units of Y (2:5). Fixed costs are $49,500. The unit contribution margins for X and Y are $2.50
and $1.20, respectively.

12. Considering the company as a whole, the number of composite units to breakeven is BONUS
A. 31,500 C. 8,250
B. 4,500 D. 9,900

13. If the company had an operating income of P22,000, the unit sales must have been BONUS
Product X Product Y Product X Product Y
A. 5,000 12,500 C. 23,800 59,500
B. 13,000 32,500 D. 28,600 71,500
14. Bush Electronics, Inc. had the following sales results for 2010:
TV Sets CD Player Radios
Peso sales component ratio 0.30 0.30 0.40
Contribution margin ratio 0.40 0.40 0.60

Bush electronics, Inc had fixed costs of P2,400,000.

The break-even sales in pesos for Bush Electronics, Inc.are:

TV sets CD Player Radios
A. P1,800,000 P1,800,000 P3,600,000
B. P1,800,000 P1,800,000 P1,600,000
C. P1,500,000 P1,500,000 P2,000,000
D. P1,531,915 P1,531,915 P2,042,553
.
15. Mason enterprises has prepared the following budget for the month of July:
Selling Price Variable Cost
Per Unit Per Unit Unit Sales
Product A P10.00 P4.00 15,000
Product B 15.00 8.00 20,000
Product C 18.00 9.00 5,000

Assuming that total fixed costs will be P150,000 and the mix remains constant, the breakeven
point rounded to the next higher whole unity will be
A. 20,455 units. C. 21,819 units.
B. 21,429 units. D. 6,818 units.

16. Below is an income statement for Thompson Company:

Sales P400,000

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 Variable costs (125,000)
Contribution margin P275,000
Fixed costs (200,000)
Profit before taxes P 75,000

What is Thompson’s degree of operating leverage?

A. 3.67 C. 1.45
B. 5.33 D. 2.67

Questions 17 and 18 are based on the following data:

Hope Company sells a product with a unit sales of P50 and a unit variable cost of P30. It needs to sell
40,000 units to breakeven. It expects to sell 90,000 units in the coming period from a previous of 75,000
units.
17. Hope’s degree of operating leverage is
A. 1.875 C. 2.143
B. 1.800 D. 1.250
18. The percentage change in EBIT in the coming period as compared to the last period is
A. 42.86% C. 37.50%
B. 36.00% D. 25.00%
19. Two companies are expected to have annual sales of 1 million decks of playing cards next year.
Estimates for next year are presented below:
Company 1 Company2
Selling price per deck P3.00 P 3.00
Cost of paper per deck .62 .65
Printing ink per deck .13 .15
Labor per deck .75 1.25
Variable overhead per deck .30 .35
Fixed costs P960,000 P252,000
Given these data, which of the following responses is correct?
Volume in Units at which
BEPU for BEPU for Profits of Company 1
Company 1 Company 2 and Company 2 are equal
A. 800,000 420,000 1,180,000
B. 800,000 420,000 1,000,000
C. 533,334 105,000 1,000,000
D. 533,334 105,000 1,180,000

20. The following data relate to Homer Company which sells a single product:
Unit selling price P 20.00
Purchase cost per unit 11.00
Sales commission, 10% of selling price 2.00
Monthly fixed costs 80,000
The firm’s salespersons would like to change their compensation from a 10 percent commission to a 5
percent commission plus P20,000 per month in salary. They now receive only commissions. At what
sales volume would the two compensation plans be indifferent?
A. 12,500 C. 22,222
B. 20,000 D. 22,860

21. Two companies produce and sell the same product in a competitive industry. Thus, the selling price of
the product for each company is the same. Company 1 has a contribution margin ratio of 40% and fixed
costs of P25 million. Company 2 is more automated, making its fixed costs 40% higher than those of
Company 1. Company 2 also has a contribution margin ratio that is 30% greater than that of Company
1. By comparison, Company 1 will have the <List A> breakeven point in terms of dollar sales volume

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and will have the <List B> dollar profit potential once the indifference point in dollar sales volume is
exceeded.
ListA List B
A. Lower Lesser
B. Lower Greater
C. Higher Lesser
D. Higher Greater