Cost-Volume-Profit Analysis

True/False

1. In cost-volume-profit analysis, the volume index is always stated in units.

Answer: False

2. One characteristic common to all types of costs is the tendency to rise and fall in direct
proportion to changes in the volume of business output.
Answer: False

3. Variable costs which increase in total amount in direct proportion to an increase in output
represent a constant amount per unit of output.
Answer: True

4. Any business which operates at less than capacity will have smaller fixed costs than variable
costs.
Answer: False

5. When cost-volume-profit analysis is used, the need for a cost accounting system is eliminated.
Answer: False

6. Variable costs are usually transformed into fixed costs when a business operates at less than
full capacity.
Answer: False

7. With variable costs, the cost per unit varies with changes in volume.
Answer: False

8. The volume of output which causes fixed costs to be equal in amount to total revenue is called
the break-even point.
Answer: False

9. The contribution margin is the difference between total revenue and fixed costs.
Answer: False

10. In a cost-volume-profit graph, the dollar amount by which actual sales exceed break-even
sales volume is called the margin of safety. The margin of safety sales volume times the
contribution margin ratio equals operating income.
Answer: True

11. With fixed costs, the cost per unit varies with changes in volume.
Answer: True

12. The higher the unit contribution margin, the higher the volume of unit sales required to cover
a given amount of fixed costs.
Answer: False

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13. Contribution margin is total revenue less variable costs.
Answer: True

14. Margin of safety is the dollar amount by which actual sales volume exceeds the break-even
sales volume.
Answer: True

15. In cost-volume-profit analysis, the number of units sold is assumed to be equal to the number
of units produced.
Answer: True

16. Executive salaries are typically considered variable costs.

Answer: False

17. As volume increases, per unit variable costs stay the same.
Answer: True

18. As volume increases per unit fixed costs stay the same.
Answer: False

19. Economies of scale can be achieved by using facilities more intensively.

Answer: True

20. The range over which output may be expected to vary is called the relevant range.
Answer: True

21. The break-even point is the level of activity at which operating income is equal to cost of
goods sold.
Answer: False

22. The contribution margin is the amount by which revenue exceeds variable costs.
Answer: True

23. Contribution margin ratio is equal to contribution margin per unit divided by unit sales price.
Answer: True

Multiple Choice

24. When volume increases, fixed costs per unit:

A) Increase.
B) Decrease.
C) Stay the same.
D) Increase or decrease, depending upon the situation.
Answer: B

25. In cost-volume-profit analysis, income tax expense:

A) Is included among the monthly operating expenses as a variable cost.
B) Is considered a fixed cost of doing business.
C) Is treated as a semi-variable cost that is partially dependent upon sales volume.
D) Is generally ignored.
Answer: D

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26. A semi-variable cost:
A) Increases and decreases directly and proportionately with changes in volume.
B) Changes in response to a change in volume, but not proportionately.
C) Increases if volume increases, but remains constant if volume decreases.
D) Changes inversely in response to a change in volume.
Answer: B

27. Which of the following is an example of a fixed cost for an airline?

A) Depreciation on the corporate headquarters.
B) Fuel costs.
C) Income taxes expense.
D) Passengers' meals.
Answer: A

28. In order to calculate break-even sales units, fixed costs are divided by:
A) Contribution margin per unit.
B) Contribution margin percentage.
C) Target operating income.
D) Sales volume.
Answer: A

30. The break-even point in a cost-volume-profit graph is always found:

A) At 50% of full capacity.
B) At the sales volume resulting in the lowest average unit cost.
C) At the volume at which total revenue equals total variable costs.
D) At the volume at which total revenue equals total fixed costs plus total variable costs.
Answer: D

31. Operating income can be calculated by:

A) Fixed costs divided by contribution margin ratio.
B) Fixed costs multiplied by contribution margin ratio.
C) Margin of safety multiplied by contribution margin ratio.
D) Margin of safety divided by contribution margin ratio.
Answer: C

32. The contribution ratio is computed as:

A) Sales minus variable costs, divided by sales.
B) Fixed costs plus variable costs, divided by sales.
C) Sales minus fixed costs, divided by sales.
D) Sales divided by variable costs.
Answer: A

35. The margin of safety is calculated by:

A) (Fixed costs plus target income) divided by contribution margin.
B) Current income minus break-even income.
C) Current sales minus break-even sales.
D) Current contribution margin minus fixed costs.
Answer: C

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37. All other things held constant, how will an increase in selling price affect the break even
point measured in units?
A) The break even point will decrease.
B) The break even point will increase.
C) The break even point will remain constant.
D) The effect on the break even point can't be predicted with certainty.
Answer: A

38. A 45% contribution margin ratio means that:

A) The company should contribute 45% of its operating income to qualified charities for
maximum tax benefits.
B) 55% of the company's revenue is consumed by fixed and variable costs.
C) The company's revenue has increased by 45% during the current accounting period.
D) 45% of the company's revenue is available to cover fixed costs and to contribute toward
operating income.
Answer: D

40. A fixed cost may include all of the following except:

A) Rent for the warehouse.
B) Annual salary of the CEO.
C) Depreciation.
D) Sales commission expense.
Answer: D

41. Contribution margin may be expressed as:

A) A percentage of revenue.
B) A total dollar amount for the period.
C) A contribution margin per unit.
D) All of the above.
Answer: D

43. If a product sells for $6, variable costs are $4 and fixed costs are $100,000 what would total
sales have to be in order to break-even?
A) $190,000.
B) $199,999.
C) $300,000.
D) $399,999.
Answer: C
Feedback:
100,000/(6 4) =50,000 x 6 = 300,000

44. Variable costs would include:

A) Rent expense.
B) Depreciation expense.
C) Sales commission expense.
D) Executive salaries expense.
Answer: C

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45. Fixed costs:
A) Fall as sales volume falls.
B) Rise as sales volume rises.
C) Rise as sales volume falls.
D) Remain steady when sales volume changes.
Answer: D

46. If unit sales prices are $6 and variable costs are $4 per unit how many units would have to be
sold to break even if fixed costs equal $6,000?
A) 1,000
B) 2,000
C) 3,000
D) 2,800
Answer: C
Feedback:
6,000/(6-04) = 3,000

47. If unit sales are $5 and variable costs are $2, how many units have to be sold to earn a profit
of $4,200 if fixed costs equal $6,000?
A) 1,200
B) 2,000
C) 3,000
D) 3,400
Answer: D
Feedback:
6,000 + 4,200/(5 2) = 3,400

48. If unit sales are $14, variable costs are $7 per unit and fixed costs are $24,000 what is the
contribution ratio per unit?
A) 40%
B) 50%
C) 60%
D) 70%
Answer: B
Feedback:
(14 7)/ 14 = 50%

49. If unit sales are $14, variable costs are $7 per unit and fixed costs are $42,000 what are the
sales in dollars in order to break even?
A) $105,000
B) $84,000
C) $70,000
D) $60,000
Answer: B
Feedback:
42,000/.50 = 84,000

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50. If unit sales are $14, variable costs are $7 per unit and fixed costs are $42,000, how many
units must be sold to earn $250,000
A) 52,142
B) 41,715
C) 34,762
D) 29,796
Answer: B
Feedback:
(42,000 + 250,000)/7 = 41,715

60. Management expects total sales of $40 million, a margin of safety of $10 million, and a
contribution margin ratio of 45%. Which of the following estimated amounts is not consistent
with this information?
A) Variable costs, $22 million.
B) Fixed costs, $18 million.
C) Operating income, $6 million.
D) Break-even sales volume, $30 million.

Answer: C
Feedback:
BC

61. Dorsey Company produces a single product which it sells for $86 a unit. If the fixed costs of
manufacturing and selling the product are $64,200 a month and the variable costs are $54 a unit:
A) The fixed costs amount to $32 per unit at any level of output within a relevant volume range.
B) The company will break even with a sales volume of $64,200 a month.
C) An increase in sales volume above $64,200 a month will cause an increase in fixed costs.
D) The contribution margin per unit of product is $32.
Answer: D
Feedback:
86 54 = 32

62. A company with an operating income of $68,000 and a contribution margin ratio of 54% has
a margin of safety of:
A) $36,720.
B) $125,925.
C) $147,826.
D) It is not possible to determine the margin of safety from the information provided.
Answer: B
Feedback:
68,000/.54 = 125,925

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63. The following information is available:

What is the operating income?

A) $0.
B) $40,000.
C) $8,000.
D) $10,000.
Answer: D
Feedback:
(80,000 40,000) x .25 = 10,000

64. A company with monthly revenue of $120,000, variable costs of $50,000, and fixed costs of
$40,000 has a contribution margin of:
A) $120,000.
B) $80,000.
C) $70,000.
D) $35,000.
Answer: C
Feedback:
120,000 50,000 = 70,000

65. A company with monthly fixed costs of $160,000 expects to earn monthly operating income
of $20,000 by selling 6,000 units per month. What is the company's expected unit contribution
margin?
A) $30.
B) $28.
C) $2.
D) The information given is insufficient to determine unit contribution margin.
Answer: A
Feedback:
160,000 + 20,000 = 6,000x; x = 30

66. If the monthly sales volume required to break even is $189,000 and monthly fixed costs are
$54,900, the contribution margin ratio is:
A) 29%.
B) 71%.
C) 42.9%.
D) 333.33%.
Answer: A
Feedback:
189,000 x = 54,900; x = 29%

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67. If monthly fixed costs are $19,000 and the contribution margin ratio is 40%, the monthly
sales volume required to break even is:
A) $7,600.
B) $47,500.
C) $76,000.
D) $26,600.
Answer: B
Feedback:
19,000/.4 = 47,500

68. Product X sells for $30 per unit and has related variable costs of $20 per unit. The fixed costs
of producing product X are $60,000 per month. How many units of product X must be sold each
month to earn a monthly operating income of $80,000?
A) 4,667.
B) 7,000.
C) 14,000.
D) 9,000.
Answer: C
Feedback:
(60,000 + 80,000)/10 = 14,000

Use the following to answer questions 69-71

The following data are available for product no. CF72, manufactured and sold by Gold
Corporation:

69. Refer to the above information. The contribution margin per unit for product no. CF72 is:
A) $27.
B) $81.
C) $118.
D) $64.
Answer: B
Feedback:
202.50 121.50 = 81

70. Refer to the above information. The number of units of CF72 that Gold must sell to break
even is (rounded, if necessary):
A) 30,000.
B) 20,500.
C) 8,200.
D) 12,300.
Answer: D
Feedback:
996,300/81 = 12,300

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71. Refer to the above information. The dollar sales volume to produce operating income of
$247,500 is:
A) $2,073,000.
B) $4,146,000.
C) $2,487,600.
D) $3,109,500.
Answer: D
Feedback:
(996,300 + 247,500)/.4 = 3,109,500

Use the following to answer questions 72-76

All County Associates sells only one product, with a current selling price of $70 per unit.
Variable costs are 40% of this selling price, and fixed costs are $12,000 per month. Management
has decided to reduce the selling price to $65 per unit in an effort to increase sales. Assume that
the cost of the product and fixed operating expenses are not changed by this reduction in selling
price.

72. Refer to the above information. At the current selling price of $70 per unit, the contribution
margin ratio is:
A) 60%.
B) 40%.
C) 67%.
D) 120%.
Answer: A
Feedback:
(70 28)/70 = 60%

73. Refer to the above information. At the current selling price of $70 per unit, the dollar
volume of sales per month necessary for All County to break even is:
A) $12,000.
B) $20,000.
C) $30,000.
D) Some other amount.
Answer: B
Feedback:
12,000/.6 = 20,000

74. Refer to the above information. At the current selling price of $70 per unit, what dollar
volume of sales per month is required for All County to earn a monthly operating income of
$15,000?
A) $25,000.
B) $30,000.
C) $45,000.
D) Some other amount.
Answer: C
Feedback:
(12,000 + 15,000)/.6 = 45,000

75. Refer to the above information. At the reduced selling price of $65 per unit, the contribution
margin ratio is (rounded, if necessary):
A) 43.1%.

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B) 56.9%.
C) 52.8%.
D) Some other percentage.
Answer: B
Feedback:
(65 28)/65 = 56.9%

76. Refer to the above information. At the reduced selling price of $65 per unit, what dollar
volume of sales per month is required to break even? (Rounded)
A) $27,842.
B) $22,727.
C) $21,090.
D) $27,842.
Answer: C
Feedback:
12,000/56.9% = 21,090

Use the following to answer 77-81

Great Gadget Company produces a single product with a current selling price of $160. Variable
costs are $120 per unit, and fixed costs per month average $5,180. Management is considering
increasing the selling price to $180 per unit. Assume that the cost of the product and monthly
fixed expenses will not change as a result of the proposed increase in selling price.

77. Refer to the above information. At the current selling price of $160 per unit, the contribution
margin ratio is:
A) 25%.
B) 75%.
C) 33 1/3%.
D) 30%.
Answer: A
Feedback:
(160 120)/160 = 25%

78. Refer to the above information. At the current selling price of $160 per unit, what dollar
volume of sales per month is required for Great Gadget to break even?
A) $5,120.
B) $6,907.
C) $20,720.
D) $15,556.
Answer: C
Feedback:
5,180/.25 = 20,720

79. Refer to the above information. At the current selling price of $160 per unit, what dollar
volume of sales per month is necessary for Great Gadget to generate monthly operating income of
$9,000?
A) $36,000.
B) $18,907.

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C) $59,200
D) $56,720.
Answer: D
Feedback:
(9,000 + 5,180)/.25 = 56,720

80. Refer to the above information. At the proposed increased selling price of $180 per unit, the
contribution margin ratio is:
A) 60%.
B) 33.3%.
C) 66 2/3%.
D) 50%.
Answer: B
Feedback:
(180 120)/180 = 33.3%

81. Refer to the above information. At the proposed increased selling price of $180 per unit,
what dollar volume of sales per month is required to break even?
A) $15,556.
B) $14,400.
C) $13,440.
D) $14,940.
Answer: A
Feedback:
5,180/.333 = 15,556

Use the following to answer 82-86

Empress Company produces a single product. The selling price is $50 per unit, and variable costs
amount to $20 per unit. Empress 's fixed costs per month total $80,000.

82. Refer to the above information. What is the contribution margin ratio of Empress 's product?
A) 25%.
B) 75%.
C) 60%.
D) 40%.
Answer: C
Feedback:
(50 20)/50 = 60%

83. Refer to the above information. What is the monthly sales volume in dollars necessary to
break even? (Rounded)
A) $320,000.
B) $106,667.
C) $200,000.
D) $133,333.
Answer: D
Feedback:
80,000/.6 = 133,333
84. Refer to the above information. How many units must be sold each month to earn a monthly
operating income of $25,000?

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A) 833.
B) 2,300.
C) 3,500.
D) Some other amount.
Answer: C
Feedback:
(80,000 + 25,000)/30 = 3,500
85. Refer to the above information. What will be the monthly margin of safety (in dollars) if
3,000 units are sold each month?
A) $16,667.
B) $100,000.
C) $12,000.
D) $150,000.
Answer: A
Feedback:
(3,000 x 50) 133,333 = 16,667
86. Refer to the above information. What will be Empress 's monthly operating income if 3,700
units are sold each month?
A) $15,000.
B) $31,000.
C) $75,000.
D) $105,000.
Answer: B
Feedback:
(3,700 x 50) 80,000 (20 x 3,700) = 31,000

87. Bergen Company earns an average contribution margin ratio of 40% on its sales. The local
store manager estimates that he can increase monthly sales volume by $35,000 by spending an
additional $5,000 per month for direct mail advertising. Compute the monthly increase in
operating income if the manager's estimate about the increased sales volume is accurate.
A) $9,000.
B) $21,000.
C) $14,000.
D) $16,000.
Answer: A
Feedback:
(35,000 x .4) 5,000 = 9,000

88. Collins & Sons generates an average contribution margin ratio of 45% on its sales.
Management estimates that by spending $3,500 more per month to rent additional facilities, the
business will be able to increase operating income by $10,000 per month. Management must feel
that the additional facilities will increase monthly sales volume (in dollars) by:
A) $4,725.
B) $8,775.
C) $13,500.
D) $30,000.
Answer: D
Feedback:
.45x 3,500 = 10,000
.45x = 13,500

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x = 30,000

Use the following to answer 89-93

Russ Corporation manufactures a single product. The selling price is $80 per unit, and variable
costs amount to $64 per unit. The fixed costs are $16,000 per month.

89. Refer to the above information. What is the contribution margin ratio of Russ 's product?
A) 65%.
B) 80%.
C) 72%.
D) 20%.
Answer: D
Feedback:
(80 64)/80 = 20%

90. Refer to the above information. What is the monthly sales volume in dollars necessary to
break even?
A) $80,000.
B) $64,000.
C) $56,250.
D) $73,000.
Answer: A
Feedback:
16,000/.20 = 80,000

91. Refer to the above information. How many units must be sold each month to earn a monthly
operating income of $6,000?
A) 1,000.
B) 1,375.
C) 80,000.
D) 417.
Answer: B
Feedback:
(16,000 + 6,000)/16 = 1,375

92. Refer to the above information. What will be the monthly margin of safety (in dollars) if
1,600 units are sold each month?
A) $80,000.
B) $48,000.
C) $13,000.
D) $16,000.
Answer: B
Feedback:
(1,600 x 80) 80,000 = 48,000

93. Refer to the above information. What will be Russ's monthly operating income if 1,600 units
are sold each month?
A) $112,000.
B) $25,600.
C) $24,800.
D) $9,600.

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Answer: D
Feedback:
(1,600 x 80) 16,000 (1,600 x 64) = 9,600

Use the following to answer 94-95

Gwynne Enterprises manufactures springs and shock absorbers. Springs account for 40% of the
company's total sales revenue, whereas shocks account for about 60%. The contribution margin
ratios for springs and shocks are 45% and 35%, respectively. Fixed costs average $500,000 per
month.

94. Refer to the above information. Gwynnes monthly break-even point expressed in sales
dollars is:
A) $1,111,111.
B) $1,282,051.
C) $1,301,586.
D) $1,428,571.
Answer: C
Feedback:
(500,000 x .4)/.45 + (500,000 x .6)/.35 = 1,301,586

95. Refer to the above information. In order to earn an operating income of $182,500, Gwynne
must generate total sales of approximately:
A) $1,600,000.
B) $1,725,000.
C) $1,750,000.
D) $1,800,000.
Answer: C
Feedback:
(500,000 + 182,500)/(.40 x .45) + (.60 x .35) = 1,750,000

Essay

96. Accounting terminology

Listed below are nine technical accounting terms introduced or emphasized in this chapter:

Each of the following statements may (or may not) describe one of these technical terms. In the
space provided below each statement, indicate the accounting term described, or answer "None"
if the statement does not correctly describe any of the terms.
____ (a) The amount by which sales revenue exceeds total variable cost expressed as a
percentage of sales.
____ (b) The amount by which sales volume exceeds the break-even point.
____ (c) The study of financial statements by a potential investor or creditor as a means of
evaluating the profitability and solvency of a business.
____ (d) A type of activity that has a causal effect in the occurrence of a particular cost.

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____ (e) The level of sales at which revenue equals operating expenses.
____ (f) A cost that responds to changes in sales volume by less than a proportionate amount.
____ (g) A mathematical technique used to determine the fixed and variable elements of a mixed
or semivariable cost.
Answer:
(a) Contribution margin ratio (b) Margin of safety (c) None (The statement describes financial
statement analysis. Cost-volume-profit analysis requires more detailed data than are available in
financial statements and generally is performed by managers, rather than outsiders.) (d) Cost
driver (e) Break-even point (f) None (This describes semivariable costs). (g) High-low method

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100. Cost-volume-profit analysis
Sylvia Company, a sole proprietorship, sells only one product. The regular price is $140. Variable
costs are 55% of this selling price, and fixed costs are $7,400 a month.
Management decides to decrease the selling price from $140 to $125 per unit. Assume that the
cost of the product and the fixed operating expenses are not changed by this pricing decision.
(a) At the original selling price of $140 a unit, what is the contribution margin ratio?
_______________%
(b) At the original selling price of $140 a unit, what dollar volume of sales per month is required
for Sylvia Company to break even? $_______________
(c) At the original selling price of $140 a unit, what dollar volume of sales per month is required
for Sylvia Company to earn a monthly operating income of $5,500? $________________
(d) At the reduced selling price of $125 a unit, what is the contribution margin ratio?
_______________%
(e) At the reduced selling price of $125 a unit, what dollar volume of sales per month is required
to break even? $_______________
Computations
Answer:
Computations

Answer:
(a) 45% (b) $16,445 (c) $28,667 (d) 38.4% (e) $19,271
Computations
(a) Sales price (100%) minus variable costs (55%) = 45%

(b)

(c)

$7,400 + $5,500
= = $28,667
45%
(d)
unit sales price - variable costs per unit
Contribution margin =
unit sales price
$125 ($140 x 55%
= = 38.4%
$125

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(e)

7400
= = 19,271
.384

101. Cost-volume-profit relationships

Clean-Up, Inc., sells only one product. The sales price per unit is $60, with variable cost per unit
of $50. Fixed costs are $70,000 per month. Maximum capacity is 44,000 units per month. Answer
the following questions:
(a) To break even, how many units must Clean-Up sell per month? _______________ units
(b) If Clean-Up, Inc., sold 25,000 units, what would be its operating income for the month?
$________________
(c) At present capacity, what is the maximum operating income Clean-Up can expect to earn per
month? $________________
(d) Assuming that direct labor cost can be reduced by $2 per unit, what would Clean-Ups
maximum operating income be per month? $_______________
Computations
Answer:
(a) 7,000 units (b) $180,000 (c) $370,000 (d) $458,000
Computations
(a) $70,000 fixed costs / $10 contribution margin = 7,000 units
(b) $1,500,000 sales revenue - (25,000 units x $50 per unit) variable costs - $70,000 fixed costs =
$180,000 operating income
(c) $2,640,000 sales revenue - (44,000 units x $50 per unit) variable costs - $70,000 fixed costs =
$370,000 operating income
(d) $2,640,000 sales revenue - (44,000 units x $48 per unit) variable costs - $70,000 fixed costs =
$458,000 operating income

102. Using cost-volume-profit formulas

Brian Corporation manufactures a single product. The selling price is $104 per unit, and variable
costs amount to $78 per unit. The fixed costs are $36,000 per month.
(a) What is the contribution margin per unit? $_______________ per unit
(b) What is the contribution margin ratio? _______________%
(c) What is the monthly sales volume (in dollars) at the break-even point? $________________
(d) How many units must be sold each month to earn a monthly operating income of $32,000?
_______________units
(e) What is the monthly margin of safety (in dollars) if 3,000 units are sold each month?
$_______________
(f) What will be the monthly operating income if 3,000 units are sold each month?
$_______________
Computations

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Answer:
(a) $26 per unit (b) 25% (c) $144,000 (d) 2,616 units (e) $168,000
(f) $42,000
Computations

103. Using cost-volume-profit formulas

Rainbow Corporation manufactures a single product. The selling price is $120 per unit, and
variable costs amount to $76 per unit. The fixed costs are $28,400 per month.
(a) What is the contribution margin per unit? $_______________ per unit
(b) What is the contribution margin ratio? _______________% (Rounded to 1 decimal place)
(c) What is the monthly sales volume (in dollars) at the break-even point? $________________
(d) How many units must be sold each month to earn a monthly operating income of $40,000?
_______________units
(e) What is the monthly margin of safety (in dollars) if 1,500 units are sold each month?
$_______________
(f) What will be the monthly operating income if 1,500 units are sold each month?
$_______________
Computations

Answer:
(a) $44 per unit (b) 36.7% (c) $77,384 (d) 1,555 units (e) $102,616
(f) $37,660
Computations

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104. Estimating costs and profit
World-Wide, Inc. expects total sales of $55 million, a margin of safety of $25 million, and a
contribution margin ratio of 25%. Compute the following:
(a) Variable costs: $_________________
(b) Break-even sales volume (in dollars): $_________________
(c) Fixed costs: $_________________
(d) Operating income: $_________________
Answer:

105. Estimating costs and profit

Always Ready Company sells a single product. The unit selling price is $275, and variable costs
are 60% of this selling price. Fixed costs are currently $55,000 per month.
(a) Calculate the monthly break even point in units. ____________ Units.
(b) Always Ready is considering the acquisition of new robotic equipment. Depreciation on the
new robots will increase monthly fixed costs by $6,000, but reduce variable costs to 50% of the
current selling price. If Always Ready acquires the robots what will be the new monthly break
even point in units? ________________________ Units.
Answer:
(a) Break-even point: $55,000 ($275 (.60 x $275) = 500 units
(b) Break-even point: $61,000 ($275 - .50 x $275) = 444 units

107. Ralph Byrd, Inc. wants to manufacture a new cell phone that can be worn on the wrist.
Information from doing market research shows that he can sell this phone for $30 each. His fixed
costs would be $135,000 a year and variable costs would amount to $12 per phone.
(1) What would the contribution margin ratio be?
(2) What sales volume in units would Ralph need to break-even?
(3) What sales volume in units would Ralph need to earn $200,000 profit?
(4) What would be the margin of safety if he sold 25,000 units?
Answer:
(1) 30 12 = 18/30 or 60%
(2) Break-even = 135,000/18 = 7,500 units
(3) To earn a profit of $200,000 (200,000 + 135,000)/ 18 = 18,611 units
(4) Margin of safety = 135,000/.60 = $225,000 sales to break even
25,000 x $30 = 750,000 225,000 = 525,000

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108. A manufacturing company produced the following report:

Required:
(1) How many units would have to be sold to break even?
(2) If fixed overhead were to increase by $1,800 what would breakeven be in units?
(3) What is operating income if sales increase by 25%?
Answer:
(1) Contribution margin: 200 145 15 = 40
(500 + 4000) / 40 = 112.5 or 113 units
(2) (500 + 4000 + 1800) / 40 = 157.5 or 158 units
(3)

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 NAME #

10-MINUTE QUIZ A SECTION

Information regarding a product manufactured and sold by Preston is shown below:

Maximum capacity with existing facilities............................... 4,000 units

Total fixed costs per month...................................................................... $50,000
Variable cost per unit............................................................................... $42.00
Sales price per unit.................................................................................. $56.00

1 Refer to the above data. The contribution margin ratio for this product is:
a 20%. c 30%.
b 25%. d 40%.
2 Refer to the above data. The number of units Preston must sell to break even is:
(rounded)
a 3,927. c 4,823.
b 3572. d 5,140.
3 Refer to the above data. The dollar sales volume necessary to produce monthly
operating income of $12,000 before taxes is:
a $188,000. c $288,000.
b $186,000. d $248,000.

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 NAME #

10-MINUTE QUIZ B SECTION

1 Management predicts total sales for June to be $3,000,000, yielding a margin of

safety of $1,000,000 and a contribution margin ratio of 25%. Which of the
following amounts is not consistent with this information?
a Fixed costs, $500,000.
b Variable costs, $750,000.
c Operating income, $250,000.
d Break-even sales volume, $2,000,000.

NAME _____________________#

10-MINUTE QUIZ C SECTION

Freeman Company sells only one product. The regular selling price is $40. Variable costs are
70% of this selling price, and fixed costs are $5,500 per month.
Management decides to increase the selling price from $40 to $45 per unit. Assume that
the cost of the product and the fixed operating expenses are not changed by this pricing
decision.

1 Refer to the above data. At the original selling price of $40 per unit, what is the contribution
margin ratio? ____________%

2 Refer to the above data. At the original selling price of $40 per unit, how many units must
Freeman sell to break even? ____________units

3 Refer to the above data. At the original selling price of $40 per unit, what dollar volume of
sales per month is required for Freeman to earn a monthly operating income of $4,000?
$____________

4 Refer to the above data. At the increased selling price of $45 per unit, what is the
contribution margin ratio? ____________% (Round to one decimal place)

5 Refer to the above data. At the increased selling price of $45 per unit, what dollar volume of
sales per month is required to break even? $_____________

NAME #

10-MINUTE QUIZ D SECTION

Haywood brews reduced calorie beer and regular beer. Sales of its reduced calorie beer
represent 25% of the companys total revenue. Sales of regular beer represent the remaining
75%. Reduced calorie beer has a contribution margin ratio of 80%, whereas the contribution
margin ratio of regular beer is only 60%. Haywoods monthly fixed costs average $812,500.

1 What is the companys monthly break-even point expressed in sales dollars? $__________

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2 What monthly sales level must be achieved for Haywood to earn a monthly operating income
of $325,000? $__________

3 If Haywood generates $1,350,000 in monthly sales, it will earn a monthly operating income of
$__________.

4 Assume Haywoods margin of safety was $250,000 in May. What was the companys
operating income in May? $__________.

5 If Haywoods monthly fixed costs increase by $6,500, what level of monthly sales revenue
will be required to break-even? $__________.

SELF-TEST QUESTIONS FROM TEXTBOOK

Choose the best answer for each of the following questions and insert the identifying
letter in the space provided.

1 During the current year, the net sales of Ridgeway, Inc. were 10% below last
years level. You should expect Ridgeways semi variable costs to:
a Decrease in total, but increase as a percentage of net sales.
b Increase in total, and increase as a percentage of net sales.
c Decrease in total, and decrease as a percentage of net sales.
d Increase in total, but decrease as a percentage of net sales.

2 Marston Company sells a single product at a sales price of $50 per unit. Fixed
costs total $15,000 per month, and variable costs amount to $20 per unit. If
management reduces the sales price of this product by $5 per unit, the sales
volume needed for the company to break even will:
a Increase by $5,000.
b Increase by $4,500.
c Increase by $2,000.
d Remain unchanged.

3 Olsen Auto Supply earns a contribution margin ratio of 40%. The store manager
estimates that by spending an additional $5,000 per month for radio advertising,
the store will be able to increase its operating income by $3,000 per month. The
manager is expecting the radio advertising to increase monthly sales volume by:
a $12,500.
b $8,000.
c $7,500.
d Some other amount.

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