CVP Practice Exercises 3MA3 Part 2
CVP Practice Exercises 3MA3 Part 2
CVP Practice Exercises 3MA3 Part 2
AMV-COLLEGE OF ACCOUNTANCY
MANAGERIAL ACCOUNTING
CVP ANALYSIS EXERCISES
C 1. All of the following statements related to the use of break-even analysis are true except:
A. a change in fixed costs changes the break-even point but not the contribution margin figure
B. a combined change in fixed and variable costs in the same direction causes a sharp change in
the break-even point
C. a change in fixed costs changes the contribution margin figure but not the break-even point
D. a change in per-unit variable costs changes the contribution margin ratio
E. a change in sales price changes the break-even point
E 2. The costing method that lends itself most readily to the preparation of break-even analysis is:
A. weighted average costing
B. absorption costing
C. first-in, first-out costing
D. semivariable costing
E. direct costing
C 4. A major assumption concerning cost and revenue behavior that is important to the development of
break-even charts is that:
A. all costs are variable
B. total costs are quadratic
C. costs and revenues are linear
D. the relevant range is greater than sales volume
E. costs will not exceed revenues
B 5. If the fixed cost attendant to a product increases while the variable cost and sales price remain
constant, the contribution margin and break-even point will:
E 6. If current sales are $1,000,000 and break-even sales are $600,000, the margin of safety ratio is:
A. 6%
B. 60%
C. 167%
D. 100%
E. 40%
SUPPORTING CALCULATION:
$1,000,000 - $600,000
= 40%
$1,000,000
A 7. Assuming that there is no effect on other products that are manufactured, a company should
discontinue a product line for economic reasons when the:
A. contribution margin from the product line is negative
B. sales of the product are less than the break-even point
C. profit from the product line is less than that for the other products
D. profit from the product line is negative
E. contribution margin from the product line is less than that for other products
C 9. Based on the cost-volume-profit chart in Figure 20-1 for a manufacturing company, the correct
statement is:
A. line b graphs total fixed costs
B. point c represents the point at which the marginal contribution per unit increases
C. line d graphs total costs
D. area e (between lines b and d) represents the contribution margin
E. area a represents the area of net loss
SUPPORTING CALCULATION:
$70,000 + $60,000
= 10,000
( $1,000,000 ÷ 50,000 ) - ( $350,000 ÷ 50,000)
SUPPORTING CALCULATION:
C 14. A company manufactures a single product that sells for $30. If the company has fixed costs of
$150,000 and a contribution margin of 40%, the break-even point in sales dollars is:
A. $250,000
B. $275,000
C. $375,000
D. $525,000
E. none of the above
SUPPORTING CALCULATION:
C 15. A company producing widgets expects to incur fixed costs during the next year of $3 million. It also
expects to incur handling costs of $1 per widget, labor costs of $3 per widget, and materials costs of
$2 per widget. The company produces widgets only when ordered and, therefore, does not incur any
carrying costs. It sells widgets for $10 each. The number of widgets that must be sold next year in
order to break even is:
A. 500,000 units
B. 600,000 units
C. 750,000 units
D. 1,000,000 units
E. none of the above
SUPPORTING CALCULATION:
Sales................................................................................................................. 100 %
Cost of sales:
Variable.................................................................................................... 50%
Fixed......................................................................................................... 10 60
Gross profit...................................................................................................... 40 %
Other operating expenses:
Variable.................................................................................................... 20%
Fixed......................................................................................................... 15 35
Operating income............................................................................................ 5%
Clark's sales totaled $2,000,000. At what sales level would Clark break even?
A. $1,900,000
B. $666,667
C. $1,250,000
D. $833,333
E. $1,666,667
SUPPORTING CALCULATION:
SUPPORTING CALCULATION:
C 18. During June, a company expects sales revenue from its only product to be $300,000, fixed costs to be
$90,000, and variable costs to be $120,000. If the company's actual sales revenue during June is
$350,000, its profit would be:
A. $90,000
B. $105,000
C. $120,000
D. $140,000
E. none of the above
SUPPORTING CALCULATION:
C 19. A company has just completed the final development of its only product, general recombinant
bacteria, that kills most insects before dying. The product has taken three years and $6,000,000 to
develop. The following costs are expected to be incurred on a monthly basis for the production of
1,000,000 pounds of the new product:
1,000,000 Pounds
Direct materials..................................................................................................... $ 300,000
Direct labor............................................................................................................ 1,250,000
Variable overhead................................................................................................. 450,000
Fixed overhead...................................................................................................... 2,000,000
Variable selling, general, and administrative expenses........................................ 900,000
Fixed selling, general, and administrative expenses............................................. 1,500,000
Total............................................................................................................... $ 6,400,000
At a sale price of $5.90 per pound, the sales in pounds necessary to ensure a $3,000,000 profit the
first year would be (to the nearest thousand pounds):
A. 13,017,000 pounds
B. 14,000,000 pounds
C. 15,000,000 pounds
D. 25,600,000 pounds
E. none of the above
SUPPORTING CALCULATION:
[ 12 ($2,000,000 + $1,500,000 )] + $3,000,000
= 15,000,000 pounds
$5 . 90 - $ . 30 - $1. 25 - $ . 45 - $. 90
C 20. A specialized version of direct costing for short-run optimization is :
A. learning theory
B. absorption costing
C. the theory of constraints
D. variable costing
E. none of the above
D 21. The theory of constraints uses which of the following basic measures :
A. throughput
B. operating expense
C. assets
D. all of the above
E. none of the above
B 22. The practice of improving a reported volume or idle capacity variance by producing more than is
currently needed is viewed by the theory of constraints as :
A. a benefit with no cost increase
B. a cost increase with no benefit
C. both a cost increase and a benefit
D. worthwhile from a cost/benefit perspective
E. none of the above
E 23. The theory of constraints is a short-run optimization technique that views which of the following as
relatively constant :
A. resources
B. technology
C. product lines
D. demand
E. all of the above
PROBLEM
1.
Terminology on Break-Even Chart. A traditional break-even chart is illustrated in Figure 20-2.
Required: Identify each letter on the chart, using the proper terminology.
SOLUTION
Lettered Item in
Break-Even Chart Terminology
A Fixed cost area
B Variable cost area
C Profit area
D Break-even point
E Loss area
F Total cost line
G Sales line
H Fixed cost line
I y-axis
J x-axis
PROBLEM
2.
Contribution Margin; Break-Even Sales in Dollars. The management of Ivory Coast Products Co. is presented with
the following data:
Sales............................................................................................................................... $ 500,000
Direct materials.............................................................................................................. $ 60,000
Direct labor..................................................................................................................... 90,000
Factory overhead........................................................................................................... 100,000 250,000
Gross profit..................................................................................................................... $ 250,000
Marketing expenses....................................................................................................... $ 70,000
General expenses........................................................................................................... 100,000 170,000
Net income..................................................................................................................... $ 80,000
Fifty percent of factory overhead is fixed, while 40% of marketing expenses and all general expenses are fixed.
Required:
(1)
Sales Variable costs $500,000 $60,000 $90,000 $50,000 $42,000
=
Sales $500,000
$258,000
= = 51 .6%
$500,000
(2)
Fixed costs $50,000 + $28,000 + $100,000 $178,000
= = = $344,961
C/M ratio .516 .516
(3)
Sales Variable costs $500,000 $60,000 $90,000 $25,000 $42,000
=
Sales $500,000
$283,000
= = 56 .6%
$500,000
( 4)
Fixed costs $75,000 + $28,000 + $100,000 $203,000
= = = $358,657
C/M ratio .566 .566
PROBLEM
3.
Expected Profits; Break-Even Point in Units; Margin of Safety; Effect of an Increase in Sales. Panko's Pickles Inc.
estimates sales of 500,000 units at $5 per unit. Variable costs generally equal $1 per unit. Fixed expenses for this
planned sales level would equal $2 per unit.
Required: Compute the following (round all answers to the nearest whole number):
(1) Estimated profit for the planned level of sales
(2) Break-even point in units and dollars
(3) Margin of safety ratio (M/S)
(4) Increase in profit that would result from a 10% increase in sales
(5) Profit as a percentage of the planned level of sales
SOLUTION
(1)
500,000 units x Unit profit = 500,000 x ($5 - $2 - $1) = $1,000,000 Estimated profit
(5)
Profit = C/M ratio x M/S ratio = 80% x 50% = 40%
PROBLEM
4.
Break-Even Point in Dollars; Direct Costing Statement; Net Income as a Percentage of Last Year's Net Income.
Mordeci Manufacturing Co. shows the following comparative income statement data for the last two years:
19A 19B
Sales (in units).......................................................................................................... 15,000 20,000
Sales.......................................................................................................................... $ 300,000 $ 400,000
Cost of goods sold:
Materials........................................................................................................... $ 150,000 $ 200,000
Labor................................................................................................................. 75,000 100,000
Overhead........................................................................................................... 30,000 35,000
Total........................................................................................................... $ 255,000 $ 335,000
Gross profit............................................................................................................... $ 45,000 $ 65,000
Other expenses........................................................................................................ 30,000 40,000
Net income............................................................................................................... $ 15,000 $ 25,000
Required:
(1) Compute the 19B net income as a percentage of 19A net income.
(2) Prepare a direct costing income statement for 19A and 19B. (Hint: Use the high- and low-points method to
determine the fixed and variable portions of each cost element.)
(3) Compute the break-even point in dollars as determined from the above data.
(Round all answers to the nearest whole number.)
SOLUTION
$25,000
= 167%
$15,000
(1)
(2)
19A 19B
Sales.......................................................................................................................... $ 300,000 $ 400,000
Less variable expenses:
Materials........................................................................................................... $ 150,000 $ 200,000
Labor................................................................................................................. 75,000 100,000
Overhead (5% of sales)1.................................................................................... 15,000 20,000
Other variable (10% of sales)2........................................................................... 30,000 40,000
Total........................................................................................................... $ 270,000 $ 360,000
Contribution margin................................................................................................. $ 30,000 $ 40,000
Less fixed expenses:
Overhead3......................................................................................................... 15,000 15,000
Net income............................................................................................................... $ 15,000 $ 25,000
Additional computations:
1 Change in overhead
Variable overhead =
Change in sales
$15,000
or
$30,000 ÷ $300,000
$15,000
= = $150,000 Breakeven point
.10
(3)
PROBLEM
5.
Break-Even Point in Units and Dollars. Professional Products Inc. manufactures two productsCType A and Type B.
Relevant budgeted sales and cost data for the coming year are:
Variable Expenses
Product Unit Sales Unit Price per Unit
Type A..................................................................... 100,000 $15 $6
Type B..................................................................... 150,000 10 7
Required: Compute the break-even point in units and in dollars for Type A and Type B.
SOLUTION
Type B 150,000
= 1.5 or 3:2
Type A 100,000