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03 Cost Volume Profit Analysis ANSWER KEY

This document provides an overview of cost-volume-profit (CVP) analysis and includes examples of its applications. It begins with 10 true/false statements about CVP concepts like contribution margin, break-even point, target profit, degree of operating leverage, and sales mix. It then poses 20 multiple choice questions testing understanding of key CVP terms and calculations. Several case problems follow that require using CVP formulas and analysis to calculate values like break-even point, target units, contribution margin ratio, and degree of operating leverage.

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1K views2 pages

03 Cost Volume Profit Analysis ANSWER KEY

This document provides an overview of cost-volume-profit (CVP) analysis and includes examples of its applications. It begins with 10 true/false statements about CVP concepts like contribution margin, break-even point, target profit, degree of operating leverage, and sales mix. It then poses 20 multiple choice questions testing understanding of key CVP terms and calculations. Several case problems follow that require using CVP formulas and analysis to calculate values like break-even point, target units, contribution margin ratio, and degree of operating leverage.

Uploaded by

Jem
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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COST-VOLUME-PROFIT (CVP) ANALYSIS

Management Accounting Review


/RCROQUE

TRUE or FALSE: FALSE = RED


1. One way to compute the total contribution margin is to add total fixed expenses to net operating income.
2. In two companies making the same product and with the same total sales and total expenses, the contribution
margin ratio will be lower in the company with a higher prop ortion of fixed expenses in its cost structure.
3. The formula for the break-even point is the same as the formula to attain a given target profit for the special
case where the target profit is zero.
4. An increase in total fixed expenses will not affect the break-even point so long as the contribution margin ratio
remains unchanged.
5. All other things the same, a reduction in the variable expense per unit will cause the break-even point to rise.
6. The unit sales volume necessary to reach a target profit is determined by dividing the target profit by the
contribution margin per unit.
7. The margin of safety in pesos equals the excess of budgeted (or actual) sales over the break-even volume of
sales.
8. A company with high operating leverage will experience a lower reduction in net operating income in a period
of declining sales than will a company with low operating leverage.
9. If Q is the quantity of a product sold, P is the price per unit, V is the variable expense per unit, and F is the
total fixed expense, then the degree of operating leverage is equal to: [Q(P-V)] ÷ [Q(P-V)-F]
10. A shift in the sales mix from products with high contribution margin ratios toward products with low
contribution margin ratios will raise the break-even point.

MULTIPLE CHOICE QUESTIONS Kindly encircle the letter of the best answer.
11. Contribution margin can be defined as:
a. the amount of sales revenue necessary to cover variable expenses
b. sales revenue minus fixed expenses
c. the amount of sales revenue necessary to cover fixed and variable expenses
d. sales revenue minus variable expenses

12. If both the fixed and variable expenses associated with a product decrease, what will be the effect on the
contribution margin ratio and the break-even point, respectively?
a. Decrease, Increase
b. Increase. Decrease
c. Decrease, Decrease
d. Increase, Increase

13. Which of the following is true regarding the contribution margin ratio of a single product company?
a. As fixed expenses decrease, the contribution margin ratio increases
b. The contribution margin ratio multiplied by the selling price per unit equals the contribution margin per
unit
c. The contribution margin ratio will decline as unit sales decline
d. The contribution margin ratio equals the selling price per unit less the variable expense ratio

14. If a company is operating at the break-even point


a. its contribution margin will be equal to its variable expenses
b. its margin of safety will be equal to zero
c. its fixed expenses will be equal to its variable expenses
d. its selling price will be equal to its variable expense per unit

15. At the break-even point


a. sales would be equal to contribution margin
b. contribution margin would be equal to fixed expenses
c. contribution margin would be equal to net operating income
d. sales would be equal to fixed expenses

16. The break-even point would be increased by


a. a decrease in total fixed expenses
b. a decrease in the ratio of variable expenses to sales
c. an increase in the contribution margin ratio
d. none of the above

17. Which of the following strategies on the selling price per unit and fixed cost, respectively, could be used to
reduce the break-even point?
a. Increase. Increase
b. Decrease, Decrease
c. Decrease, Increase
d. Increase, Decrease
18. The margin of safety can be calculated by
a. Sales − (Fixed expenses/Contribution margin ratio)
b. Sales − (Fixed expenses/Variable expense per unit)
c. Sales − (Fixed expenses + Variable expenses)
d. Sales − Net operating income

19. If the degree of operating leverage is 4, then a one percent change in quantity sold should result in a four
percent change in
a. unit contribution margin
b. revenue
c. variable expense
d. net operating income

20. Which of the following is the correct calculation for the degree of operating leverage?
a. net operating income divided by total expenses
b. net operating income divided by total contribution margin
c. total contribution margin divided by net operating income
d. variable expense divided by total contribution margin

CASE PROBLEMS

Case 1
1. 3,240 units
2. 4,280 units
3. 9,000 units
4. 3,574 units
5. 16,200 units
6. 640 units
7. 1,550 units

Case 2
REQUIRED:
1. 40%; 21,000 balls, 3.33
2. 28%; 30,000 balls
3. 42,857 balls
4. P30
5. 64%, 26,250 balls
6. A. 31,875; B. P60,000; 8

Case 3
1. P21.20; 38,510; units P636,000
2. 42.4%; P1,925,500; P328,388
3. P574,500
4. 4.352; P455,607
5. 50,396 units
6. 52,661 units

Case 4
1. 7,400; 37,000
2. I18,786; 31,310
3. P55,000 increase in profit. This is a good strategy

OTHER PROBLEMS:
1. P225,000
2. P32,000
3. 4
4. P15,400
5. P100.00
6. P205,000
7. (P8,900)
8. P32,000
9. 65,000 units
10. 151.2%
11. P52,000
12. 49,823 units
13. P2,491,150
14. 20%
15. 41,250
16. P20,000
17. P60,000

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