1. Which income statement format better facilitates the determination of a company’s break-even point?
a. Absorption costing income statement
b. Full costing income statement
c. Variable costing income statement
d. None of the above
2. Select the incorrect equation for computing the breakeven point.
a. Total Fixed Costs = Total Contribution Margin
b. Total Revenue = Total Costs
c. Total Profit = $0
d. Total Variable Costs = Total Fixed Costs
3. A Company sells a product for $7.50 whose variable cost is $2.25 per unit. The company needed to sell 20,000 shirts to break even. What was the company’s total fixed costs?
4. B Company sells a product for $7.50 whose variable cost is $2.25 per unit. The company needed to sell 20,000 shirts to break even and its net income was $5,040 before tax. How many units did the company sell?
5. W Company manufactures a product that sells for $800 per unit. The unit variable costs are $600 and total fixed costs are $6,600,000. The annual sales volume required for W Company to break even is:
d. None of the above.
6. F Company manufactures and sells T-shirts. Last year, the shirts sold for $7.50 each, and the variable cost to manufacture them was $2.25 per unit. The company needed to sell 20,000 shirts to break even. The net income last year was $5,040. F Company’s expectation for the coming year include the following:
– The selling price of the T-shirts will be $9.00
– Variable cost to manufacture will increase by one-third
– Fixed costs will increase by 10%
– The income tax rate of 40% will be unchanged
The number of T-shirts that must be sold to break even in the coming year is:
7. A calculation used in a CVP analysis determines the break-even point. Once the break-even point has been reached, operating income will increase by the:
a. contribution margin per unit for each additional unit sold.
b. gross margin per unit for each additional unit sold.
c. fixed costs per unit for each additional unit sold.
d. variable costs per unit for each additional unit sold.
8. A company sells a product for $9.00 which has a variable manufacturing cost of $3.00 per unit. Last year, the company needed to sell 20,000 shirts to break even. Assuming the company is subject to a 40% tax rate and wishes to earn $22,500 profit after tax for the coming year, what sales will be required?
9. X Company sold a product last year that had a $5.00 unit contribution margin. A significant change in the company’s production technology has caused a 10% increase in annual fixed costs but a 20% decrease in unit variable costs. Assuming there was no change in the product’s $10.00 selling price what is the company’s new contribution margin ratio?
d. Can’t be determined from the information provided
10. A significant change in Y Company’s production technology caused its total fixed costs of $6,708,716 to increase by 9%. However, the change caused a 20% unit cost decrease in direct labor and a 25% decrease in the unit material cost leading to $25 increase in its $300 unit contribution margin. After incorporating these changes, what is Y Company’s new break-even point?
a. 22,500 units
b. 20,643 units
c. 24,375 units
d. 22,363 units
11. One Company sells two products, A and B. A has a unit contribution margin of $40 while B has a unit contribution margin of $25. Last year the company sold 40,000 units of Product A and 60,000 units of Product B. What is the company’s weighted average contribution margin?
a. ($40 + $25) / 2
b. ($40 x 40,000) + ($25 x 60,000)
c. ($40 x 0.4) + ($25 x 0.6)
d. None of the above
12. For a profitable company, the amount by which sales can decline before losses occur is known as the:
a. sales volume variance.
b. hurdle rate.
c. marginal income rate.
d. margin of safety.
13. V Company sold 10,000 units of its product for $100 per unit. It’s unit variable costs are $20 and its total fixed costs are $600,000. Assuming the company has a 40% tax rate, what is its degree of operating leverage?
14. Which of the following is not an assumption of CVP analysis?
a. All revenues and variable cost are linear.
b. Mixed costs can be accurately separated into their fixed and variable components.
c. Sales exceed production.
d. Labor productivity and market conditions will not change.
15. Select the incorrect statement from the following.
a. If changes occur in selling price or cost, new computations must be made for break-even and CVP analysis.
b. In the long-term, fixed costs should be regarded as a long-term variable cost.
c. Fixed costs exist only in a short-term perspective.
d. In the future, the only nonmonetary variable included in the break-even model will be sales volume.