You correctly answered 15 questions for a score of 93 percent.

25-1. A firm sells widgets for $14 each. The variable costs for each unit is $8. The contribution margin per unit is:

93%

a. $ 6
b. $12
c. $14
d. $ 8
You answered correctly! The contribution margin per unit is calculated by subtracting the variable cost per unit ($8)
from the selling price of the unit ($14).
25-2. Company A's fixed costs were $42,000, its variable costs were $24,000, and its sales were $80,000 for the sale of
8,000 units. The company's break-even point in units is:
a. 8,000
b. 5,000
c. 6,000
d. 7,000
You answered correctly! The break-even point in units is calculated by dividing the fixed costs by the contribution
margin per unit. The break-even units are: ($80,000 - $24,000) / $7 = 6,000.
25-3. Janet sells a product for $6.25. The variable costs are $3.75. Janet's break-even units are 35,000. What is the
amount of fixed costs?
a. $ 87,500
b. $ 35,000
c. $131,250
d. $104,750
You answered correctly! The contribution margin per unit is $6.25 - $3.75 = $2.50. At break-even, total contribution
margin is equal to total fixed costs. The total contribution margin at break-even is 35,000 x $2.50 = $87,500; which is
the amount of the fixed costs.
25-4. The current sales price is $25 per unit and the current variable cost is $17 per unit. Fixed costs are $40,000. If the
sales price is increased by $2, and all other costs remain unchanged, the break-even point in units will:
a. increase by 1,000 units
b. decrease by 1,000 units
c. decrease by 2,000 units
d. decrease by 119 units (rounded to nearest unit)
You answered correctly! The current contribution margin per unit is $25 - $17 = $8. The current break-even point in
units is $40,000 / $8 = 5,000. The new contribution margin will be $27 - $17 = $10. The new break-even point in units
will be $40,000 / $10 = 4,000; a decrease of 1,000 units.
25-5. Company A's fixed costs were $45,000, its variable costs were $24,000, and its sales were $80,000. The
company's break-even point in sales-dollars is:
a. $33,000
b. $64,286
c. $79,000
d. $88,000
You answered correctly! The break-even point in sales can be calculated by dividing the fixed costs by the
contribution ratio, which is 1 minus the variable cost percentage ($24,000 / $80,000 = 0.30 = 30%). The break-even
point is: $45,000 / .70 = $64,286.
25-6. Currently, a company has fixed costs of $32,500, a contribution ratio of 65%, and is selling its product for $12 per
unit. If the sales price per unit is increased by $4, how much less will the break-even point in sales be when compared
to the current condition?
a. $14,411

b. $13,414
c. $17,500
d. $ 5,932
You answered correctly! The current break-even is $32,500 / .65, or $50,000. The new contribution ratio will be
73.75% ($12 x .65 = $7.80; $7.80 + $4.00 = $11.80; $11.80 / $16.00 = .7375 = 73.75%; $32,500 /.7375 = $44,068;
$50,000 - $44,068 = $5,932.
25-7. On a cost-volume-profit chart (break-even graph), the total fixed costs are:
a. the point where the sales line intersects the cost line (Y)
b. the point where the sales line crosses the total cost line
c. the point where the total cost line intersects the cost line (Y)
d. the point where the total cost line intersects the volume line (X)
You answered correctly! The total cost line starts on the cost line (Y axis) at the dollar level of fixed costs. The sales
line starts at 0, and the point at which it crosses the total cost line is the break-even point.
25-8. When using conventional cost-volume-profit analysis, some assumptions about costs and sales prices are made.
Which one of the following is not one of those assumptions?
a. the costs can be expressed as straight lines in a break-even graph
b. the actual variable cost per unit must vary over the production range
c. the sales price will remain unchanged per unit
d. fixed costs will decrease per unit
You answered correctly! The variable cost remains unchanged per unit of output. Assumptions #2, #3, and #4,
above, are the three basic assumptions; which also make #1 true.
25-9. A firm's fixed costs are $54,000, and it sold 350 units at $140 each. The total variable costs were $35,000. The
net income or loss of the firm was:
a. $40,000 loss
b. $40,000 income
c. $14,000 income
d. $ 9,000 loss
You answered correctly! Total revenue - variable costs - fixed costs = net income or loss. Total revenue is $140 x 350
= $49,000. $49,000 - $35,000 - $54,000 = $40,000 net loss.
25-10. With a tax rate of 25%, fixed costs of $34,000, and a contribution ratio of 45%, how much revenue is required to
achieve a desired after-tax profit of $36,000?
a. $111,111
b. $182,222
c. $149,091
d. $ 83,636
You answered correctly! After-tax profit is calculated by dividing the fixed costs, plus net income, plus income tax, by
the contribution ratio. Income before income tax is $36,000 / .75 = $48,000. The income tax is $48,000 - $36,000 =
$12,000. $34,000 + $36,000 + $12,000) / .45 = $82,000. $82,000 / .45 = $182,222.
25-11. The dollar sales necessary to achieve a target income of $21,000 after taxes of 30% is $450,000. The fixed costs
are $240,000. What is the contribution ratio (to the nearest tenth)?
a. 53.3%
b. 65.0%
c. 58.0%
d. 60.0%
You answered correctly! The income taxes are $9,000 ($21,000 / .70 = $30,000 income before taxes). (Fixed costs +
target net income + income tax) / contribution ratio = dollar sales at the targeted income. $450,000 = ($270,000 /
contribution ratio). Contribution ratio = $270,000 / $450,000 = 60%.

25-12. If a firm's margin of safety is 35% on sales of $200,000, then its margin of safety on sales of $300,000 will be
(assume fixed costs, the variable cost per unit, and the sales price per unit do not change):
a. $105,000
b. $170,000
c. $100,000
d. $ 35,000
The correct answer is "b". Your choice of "a" was incorrect. The break-even point is $130,000 ($200,000 x (1 0.35)). The margin of safety is the excess of current sales over break-even sales. The margin of safety on sales of
$300,000 will be $170,000 ($300,000 - $130,000).
25-13. Let:
BES = break-even sales, R = revenue per unit, F = fixed costs, V = variable cost per unit, CMR = contribution ratio,
CM = contribution margin per unit, S x R = sales dollars, S = sales in units
(S x R) - (F / CMR) is the:
a. break-even point in units
b. break-even point in dollars
c. margin of safety
d. sales mix composite
You answered correctly! The margin of safety is the excess of current sales dollars (S x R) less the break-even point
in dollars (F / CM R).
25-14. If the margin of safety is 40% of sales, which are $400,000, the break-even point:
a. is greater than $400,000
b. is $160,000
c. is $240,000
d. is less than $160,000
You answered correctly! The margin of safety is the amount by which current sales exceed break-even dollars;
therefore, the complement of the margin of safety is the break-even point. $400,000 x (1 - 0.40) = $240,000.
25-15. The sales mix for Emory's Hardware is as follows:Product A: 4 units @ $8 sales price; $6 variable cost per unit.
Product B: 6 units @ $7 sales price; $4 variable cost per unit.
Product C: 8 units @ $5 sales price; $3 variable cost per unit.
Emory's fixed costs are $42,000. The composite break-even units are:
a. 10,000
b. 100
c. 1,000
d. 2,000
You answered correctly! The total sales revenue per mix is (4 x $8) + (6 x $7) + (8 x $5), or $114; the total variable
cost per mix is (4 x $6) + (6 x $4) + 8 x $3), or $72; the total contribution margin per mix is $114 - $72, or $42. The
composite units are: $42,000 / $42 = 1,000.
25-16. Data from a company's last period of operations shows sales of 2,000 units, total contribution margin of $50,000,
and income after subtracting fixed costs of $30,000 is $20,000. Should the company experience sales of 2,400 units
(within the relevant range, no sales price increase), net income will be:
a. $40,000
b. $30,000
c. $10,000
d. $20,000
You answered correctly! The degree of operating leverage (DOL) is 2.5 ($50,000 / $20,000). An increase in sales of
20% ((2,400 - 2,000) / 2,000) multiplied by the DOL is 20% x 2.5, or 50%, the percentage of increase in income from
selling 400 additional units. The net income will be $20,000 x 1.5 = $30,000.

Answers from Fill-In-The-Blanks

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Question 25-1 with suggested answer:
When total sales revenue is equal to total fixed costs, a company has reached its BREAK-EVEN point.
Your answer:
When total sales revenue is equal to total fixed costs, a company has reached its break-even point.
Question 25-2 with suggested answer:
The amount that the sale of one unit contributes toward recovering fixed costs and profit is called
the CONTRIBUTIONmargin per unit
Your answer:
The amount that the sale of one unit contributes toward recovering fixed costs and profit is called
the contributionmargin per unit
Question 25-3 with suggested answer:
When the contribution margin per unit is expressed as a percentage of the product's selling price it is
called the contribution margin RATIO.
Your answer:
When the contribution margin per unit is expressed as a percentage of the product's selling price it is
called the contribution margin ratio.
Question 25-4 with suggested answer:
Predicting the volume of activity, the costs to be incurred, revenues to be received, and profits to be
earned is called CVP or COST-VOLUME-PROFIT analysis.
Your answer:
Predicting the volume of activity, the costs to be incurred, revenues to be received, and profits to be
earned is called CVP or cost-volume-profit analysis.
Question 25-5 with suggested answer:
A cost that changes with volume but not at a constant rate like pure variable costs is called
a CURVILINEAR cost
Your answer:
A cost that changes with volume but not at a constant rate like pure variable costs is called
a variable cost
Question 25-6 with suggested answer:
A FIXED cost remains unchanged in total amount even when production volume varies from period to
period.
Your answer:
A fixed cost remains unchanged in total amount even when production volume varies from period to

period.
Question 25-7 with suggested answer:
A method of drawing an estimated line of cost behaviour which connects the highest and lowest costs
on a scatter diagram with a straight line is called the HIGH-LOW method.
Your answer:
A method of drawing an estimated line of cost behaviour which connects the highest and lowest costs
on a scatter diagram with a straight line is called the visual-fit method.
Question 25-8 with suggested answer:
A method for deriving an estimated line of cost behaviour that is more precise than the high-low
method is the LEAST-SQUARES regression statistical method.
Your answer:
A method for deriving an estimated line of cost behaviour that is more precise than the high-low
method is the least-squareregression statistical method.
Question 25-9 with suggested answer:
If company sales are $450,000 and break-even sales are $375,000, the $75,000 excess can be called
the MARGIN ofSAFETY.
Your answer:
If company sales are $450,000 and break-even sales are $375,000, the $75,000 excess can be called
the margin ofsafety.
Question 25-10 with suggested answer:
Sales personnel receive an hourly wage plus a commission on sales in excess of $10,000. The sales
salary expense account which includes the hourly pay and the commissions is an example of
a MIXED cost.
Your answer:
Sales personnel receive an hourly wage plus a commission on sales in excess of $10,000. The sales
salary expense account which includes the hourly pay and the commissions is an example of
a semivariable cost.
Question 25-11 with suggested answer:
The range of sales volume that a business recognizes as its normal operating range is called
the RELEVANT RANGE of operations.
Your answer:
The range of sales volume that a business recognizes as its normal operating range is called
the relevant range of operations.
Question 25-12 with suggested answer:
A company sells 6 tons of concrete mix, 3 tons of decorative rock, and 1 ton of structural rock for
every 10 tons of product it sells. The sales ratio (6:3:1) of volumes of the various products is called
the company's SALES MIX.
Your answer:
A company sells 6 tons of concrete mix, 3 tons of decorative rock, and 1 ton of structural rock for
every 10 tons of product it sells. The sales ratio (6:3:1) of volumes of the various products is called

the company's sales miz.

Question 25-13 with suggested answer:
The cost of direct materials is $4 per unit. As production increases, the total cost of direct material will
increase proportionately, since direct material is an example of aVARIABLE cost.
Your answer:
The cost of direct materials is $4 per unit. As production increases, the total cost of direct material will
increase proportionately, since direct material is an example of a variablecost.
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