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Managerial Accounting
Chapter 7 Cost-Volume-Profit Analysis
1) The contribution margin per unit is how much profit each unit contributes after fixed costs are considered.
Answer: FALSE
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits.
2) CVP stands for Company-Volume-Profit.
Answer: FALSE
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits.
3) CVP assumes that inventory levels will not change.
Answer: TRUE
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits.
4) When using the contribution margin ratio, managers project operating income based upon sales units.
Answer: FALSE
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits.
5) A product's contribution margin per unit is the excess of the selling price per unit over the variable cost of obtaining and selling each unit.
Answer: TRUE
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits. Perform fundamental CVP calculations.
6) The contribution margin derived from different products is not used to motivate the sales force to increase sales of the most profitable products.
Answer: FALSE
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits.
7) The contribution margin ratio is the unit contribution margin divided by the variable cost per unit.
Answer: FALSE
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Perform fundamental CVP calculations.
8) If a unit sells for $12.50 and has a variable cost of $3.25, its contribution margin per unit is $9.25.
Answer: TRUE
Diff: 2
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Perform fundamental CVP calculations.
9) Contribution margin on an income statement is equal to sales revenue minus fixed expenses.
Answer: FALSE
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Perform fundamental CVP calculations.
10) Gross margin is another term for net income.
Answer: FALSE
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits.
11) CVP analysis assumes that the only factor that affects costs is a change in sale price.
Answer: FALSE
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits.
12) Total contribution margin less total fixed expenses equals
A) contribution margin ratio.
B) operating income.
C) gross profit.
D) sales revenue.
Answer: B
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
13) The unit contribution margin is computed by
A) subtracting the variable cost per unit from the sales price per unit.
B) dividing the sales revenue by variable cost per unit.
C) dividing the variable cost per unit by the sales revenue.
D) subtracting the sales price per unit from the variable cost per unit.
Answer: A
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
14) The contribution margin ratio explains the percentage of each sales dollar that
A) contributes towards variable costs.
B) contributes towards sales revenue.
C) contributes towards period expenses.
D) contributes towards fixed costs and generating a profit.
Answer: D
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits.
15) CVP analysis assumes all of the following except
A) the mix of products will not change.
B) revenues are linear throughout the relevant range.
C) inventory levels will increase.
D) a change in volume is the only factor that affects costs.
Answer: C
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Define and use cost-volume-profit analysis to analyze the effects of changes in costs and volume on a company's profits.
16) ______should be subtracted from the sales price per unit to compute the unit contribution margin.
A) All variable costs
B) Only variable inventoriable product costs
C) Only variable period costs
D) All fixed costs
Answer: A
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
17) By multiplying ______and then subtracting fixed costs, managers can quickly forecast the operating income.
A) projected sales units by the contribution margin ratio
B) projected sales revenue by the contribution margin ratio
C) projected sales revenue by the unit contribution margin
D) projected sales units by the variable cost ratio
Answer: B
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
18) Managers can quickly forecast the total contribution margin by multiplying the
A) projected sales units by the variable cost ratio.
B) projected sales units by the contribution margin ratio.
C) projected sales revenue by the unit contribution margin.
D) projected sales revenue by the contribution margin ratio.
Answer: D
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
19) Which of the following represents the excess of the selling price per unit of a product over the variable cost of obtaining and selling each unit?
A) Gross margin
B) Operating income
C) Net income
D) Unit contribution margin
Answer: D
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
20) Contribution margin ratio is computed by
A) dividing contribution margin by operating income.
B) dividing contribution margin by sales revenue.
C) dividing sales revenue by contribution margin.
D) dividing operating income by contribution margin.
Answer: B
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Perform fundamental CVP calculations.
21) What is contribution margin equal to on a contribution margin income statement?
A) Fixed expenses plus variable expenses
B) Fixed expenses minus variable expenses
C) Sales revenues minus variable expenses
D) Sales revenues minus fixed expenses
Answer: C
Diff: 2
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Perform fundamental CVP calculations.
22) Dairy Days Ice Cream sells ice cream cones for $4 per customer. Variable costs are $3 per cone. Fixed costs are $2,500 per month. What is Dairy Days' contribution margin ratio?
A) 267%
B) 25%
C) 2%
D) 63%
Answer: B
Explanation: B)
Sales $4
Less Variable costs 3
= Contribution Margin 1 divided by $4 sales = 25%
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Perform fundamental CVP calculations.
23) Dairy Days Ice Cream sells ice cream cones for $4 per customer. Variable costs are $3 per cone. Fixed costs are $2,500 per month. What is Dairy Days' contribution margin per ice cream cone?
A) $1.00
B) $3.00
C) $0.25
D) $4.00
Answer: A
Explanation: A)
Sales $4
Less Variable costs 3
= Contribution Margin 1
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
24) Mom and Pop's Ice Cream Shoppe sells ice cream cones for $5.00 per customer. Variable costs are $2.25 per cone. Fixed costs are $3,000 per month. What is the company's contribution margin ratio?
A) 182%
B) 45%
C) 3%
D) 55%
Answer: D
Explanation: D)
Sales $5.00
Less Variable costs 2.25
= Contribution Margin 2.75 divided by $5.00 sales = 55%
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Reflective thinking
Learning Outcome: Perform fundamental CVP calculations.
25) Mom and Pop's Ice Cream Shoppe sells ice cream cones for $5.00 per customer. Variable costs are $2.25 per cone. Fixed costs are $3,000 per month. What is the company's contribution margin per ice cream cone?
A) $2.25
B) $2.75
C) $0.55
D) $1.82
Answer: B
Explanation: B)
Sales$5.00
Less Variable costs 2.25
= Contribution Margin2.75
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
26) Fave Motion Pictures sells movie tickets for $10 per movie patron. Variable costs are $7.50 per movie patron and fixed costs are $50,000 per month. The company's relevant range extends to 35,000 movie patrons per month. What is Fave Motion Pictures' projected operating income if 25,000 movie patrons see movies during a month?
A) $62,500
B) $12,500
C) $250,000
D) $200,000
Answer: B
Explanation: B)
Sales $10
Less Variable costs 7.50
= Contribution Margin 2.50 × 25,000 = $62,500
Less Fixed 50,000
Operating Income $12,500
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
27) Hickory Point Amusement Park sells admission tickets for $50 per person for one visit. Variable costs are $15 per visitor and fixed costs are $60,000,000 per month. The company's relevant range extends to 2,000,000 visitors per month. What is Hickory Point's projected operating income if 1,750,000 visitors come to the park during the month?
A) $1,250,000
B) $61,250,000
C) $87,500,000
D) $27,500,000
Answer: A
Explanation: A)
Sales $50
Less Variable costs 15
= Contribution Margin 35 × 1,750,000 = 61,250,000
Less Fixed 60,000,000
Operating Income $1,250,000
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
28) Electric Jet Skis operates a jet ski rental business. Assume the jet skis rent for $55 for 6 hours. The variable costs are $33 per 6 hour rental, and its fixed costs are $80,000 each month. What is the contribution margin per 6 hour jet ski rental?
A) $33.00
B) $0.40
C) $22.00
D) $2.50
Answer: C
Explanation: C)
Sales $55
Less Variable costs 33
= Contribution Margin 22
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
29) Electric Jet Skis operates a jet ski rental business. Assume the jet skis rent for $55 per 6 hours. The variable costs are $33 per 6 hours rental, and its fixed costs are $80,000 each month. What is the contribution margin ratio?
A) 40%
B) 60%
C) 250%
D) 22%
Answer: A
Explanation: A)
Sales $55
Less Variable costs 33
= Contribution Margin 22 divided by $55 sales = 40%
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
30) LaComedia Dinner Theater sells tickets for dinner and a show for $40 each. The cost of providing dinner is $26 per ticket and the fixed cost of operating the theater is $100,000 per month. The company can accommodate 12,000 patrons each month. What is the contribution margin per patron?
A) $2.86
B) $14.00
C) $0.35
D) $26.00
Answer: B
Explanation: B)
Sales $40
Less Variable costs 26
= Contribution Margin 14
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
31) LaComedia Dinner Theater sells tickets for dinner and a show for $40 each. The cost of providing dinner is $26 per ticket and the fixed cost of operating the theater is $100,000 per month. The company can accommodate 12,000 patrons each month. What is the contribution margin ratio?
A) 65%
B) 35%
C) 14%
D) 286%
Answer: B
Explanation: B)
Sales $40
Less Variable costs 26
= Contribution Margin 14 Divided by $40 = 35%
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
32) LaComedia Dinner Theater sells tickets for dinner and a show for $40 each. The cost of providing dinner is $26 per ticket and the fixed cost of operating the theater is $100,000 per month. The company can accommodate 12,000 patrons each month. What is the projected monthly income if 10,000 patrons visit the theater each month?
A) $68,000
B) $140,000
C) $240,000
D) $40,000
Answer: D
Explanation: D)
Sales $40
Less Variable costs 26
= Contribution Margin 14 × 10,000 = $140,000
Less fixed = 100,000
Operating Income $40,000
Diff: 1
LO: 7-1
EOC: S7-2
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
33) The Settler's Chuck Wagon sells tickets for dinner and a show for $50 each. The cost of providing dinner is $23 per ticket and the fixed cost of operating the theater is $115,000 per month. The company can accommodate 13,500 patrons each month. What is the contribution margin per patron?
A) $1.85
B) $ 0.54
C) $27.00
D) $23.00
Answer: C
Explanation: C)
Sales $50
Less Variable costs 23
= Contribution Margin 27
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
34) The Settler's Chuck Wagon sells tickets for dinner and a show for $50 each. The cost of providing dinner is $23 per ticket and the fixed cost of operating the theater is $115,000 per month. The company can accommodate 13,500 patrons each month. What is the contribution margin ratio?
A) 46%
B) 185%
C) 27%
D) 54%
Answer: D
Explanation: D)
Sales $50
Less Variable costs 23
= Contribution Margin 27 Divided by $50 = 54%
Diff: 1
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
35) The Settler's Chuck Wagon sells tickets for dinner and a show for $50 each. The cost of providing dinner is $23 per ticket and the fixed cost of operating the theater is $115,000 per month. The company can accommodate 13,500 patrons each month. What is the projected monthly income if 5,500 patrons visit the theater each month?
A) $263,500
B) $148,500
C) $249,500
D) $33,500
Answer: D
Explanation: D)
Sales $50
Less Variable costs 23
= Contribution Margin 27 × 5,500 = $148,500
Less fixed = 115,000
Operating Income $33,500
Diff: 1
LO: 7-1
EOC: S7-2
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
36) Bernard Corporation gathered the following information for the year just ended:
Fixed costs:Manufacturing / $120,000
Marketing / 42,000
Administrative / 22,000
Variable costs:
Manufacturing / $80,000
Marketing / 22,000
Administrative / 38,000
During the year, Bernard produced and sold 50,000 units of product at a selling price of $9.00 per unit. There was no beginning inventory of product at the start of the year.
What is the contribution margin for the year?
A) $126,000
B) $310,000
C) $450,000
D) $266,000
Answer: B
Explanation: B)
Variable costs: Manufacturing $80,000
Marketing 22,000
Administrative 38,000
Total $140,000
Sales$9 × 50,000 = $450,000
Less Variable costs 140,000
Contribution Margin $310,000
Diff: 2
LO: 7-1
EOC: E7-17A
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
37) Bernard Corporation gathered the following information for the year just ended:
Fixed costs:Manufacturing / $120,000
Marketing / 42,000
Administrative / 22,000
Variable costs:
Manufacturing / $80,000
Marketing / 22,000
Administrative / 38,000
During the year, Bernard produced and sold 50,000 units of product at a selling price of $9.00 per unit. There was no beginning inventory of product at the start of the year.
What is the operating income (loss) for the year?
A) $266,000
B) $450,000
C) $126,000
D) $310,000
Answer: C
Explanation: C)
Variable costs: Manufacturing $80,000
Marketing 22,000
Administrative 38,000
Total $140,000
Sales $9 × 50,000 = $450,000
Less Variable costs 140,000
Contribution Margin $310,000
Less Fixed$184,000
Operating Income$126,000
Diff: 1
LO: 7-1
EOC: E7-17A
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
38) The Halpert Group produces a single product selling for $70 per unit. Variable costs are $7 per unit and total fixed costs are $5,000. What is the contribution margin ratio?
A) 10%
B) 63%
C) 90%
D) 111%
Answer: C
Explanation: C)
Sales $70
Less Variable costs 7
= Contribution Margin 63 Divided by $70 = 90%
Diff: 1
LO: 7-1
EOC: S7-17A
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
39) The following selected data relates to Ivory Corporation:
Total fixed costs / $25,000Selling price per unit / $22
Variable costs per unit / $15
Assuming 8,500 units are sold, what is the contribution margin?
A) $314,500
B) $84,500
C) $59,500
D) $34,500
Answer: C
Explanation: C)
Sales $22
Less Variable costs 15
= Contribution Margin 7 × 8,500 = $59,500
Diff: 1
LO: 7-1
EOC: E7-17A
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
40) The following selected data relates to Ivory Corporation:
Total fixed costs / $25,000Selling price per unit / $22
Variable costs per unit / $15
If sales revenue per unit increases to $27 and 8,500 units are sold, what is the contribution margin?
A) $357,000
B) $77,000
C) $59,500
D) $102,000
Answer: D
Explanation: D)
Sales $27
Less Variable costs 15
= Contribution Margin 12 × 8,500 = $102,000
Diff: 1
LO: 7-1
EOC: E7-17A
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
41) Marie's Magic Shoppe provides the following information about its single product.
Targeted operating income / $38,000Selling price per unit / $25.00
Variable cost per unit / $12.00
Total fixed cost / $85,000
What is the contribution margin ratio?
A) 192%
B) 52%
C) 13%
D) 48%
Answer: B
Explanation: B)
Sales $25
Less Variable costs 12
= Contribution Margin13 divided by $25 = 52%
Diff: 1
LO: 7-1
EOC: E7-17A
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
42) Antonio's Flowers sells bouquets for $65 each. The variable costs for each kit are $45. The total contribution margin for 30 kits is
A) $1,950.
B) $3,300.
C) $600.
D) $1,350.
Answer: C
Explanation: C)
Sales $65
Less Variable costs 45
= Contribution Margin 20 × 30 = $600
Diff: 2
LO: 7-1
EOC: E7-17A
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
43) Spice Company has a product which sells for $150 and has a unit contribution margin of $75. It has fixed costs of $35/unit at the current production volume. Spice Company's contribution margin ratio is
A) 23%.
B) 50%.
C) 37%.
D) 73%.
Answer: B
Explanation: B)
Contribution Margin $75 divided by $150 = 50%
Diff: 2
LO: 7-1
EOC: E7-17A
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
44) Helga's Pretzels sells pretzels for $5. The variable costs for each pizza are $3, while the total fixed costs are $1,500. The contribution margin for 1,500 pretzels is
A) $1,500.
B) $3,000.
C) $7,500.
D) $6,000.
Answer: B
Explanation: B)
Sales $5
Less Variable costs 3
= Contribution Margin 2 × 1,500 = $3,000
Diff: 2
LO: 7-1
EOC: E7-17A
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
45) Jack's Toys sells kites for $20 each. Variable costs are $8 per kite. Fixed costs are $2,400 per month. What is the contribution margin ratio for the kites?
A) 167%
B) 60%
C) 12%
D) 40%
Answer: B
Explanation: B)
Sales$20
Less Variable costs8
= Contribution Margin 12 divided by $20 = 60%
Diff: 2
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
46) Jack's Toys sells kites for $20 each. Variable costs are $8 per refill. Fixed costs are $2,400 per month. What is the contribution margin per kite?
A) $1.67
B) $ 0.60
C) $8.00
D) $12.00
Answer: D
Explanation: D)
Sales $20
Less Variable costs8
= Contribution Margin 12
Diff: 2
LO: 7-1
EOC: S7-1
AACSB: Analytical thinking
Learning Outcome: Perform fundamental CVP calculations.
47) The following information for the past year for the Blaine Corporation has been provided:
Fixed costs:Manufacturing / $125,000
Marketing / 23,000
Administrative / 21,000
Variable costs:
Manufacturing / $115,000
Marketing / 30,000
Administrative / 43,000
During the year, the company produced and sold 30,000 units of product at a selling price of $15.00 per unit. There was no beginning inventory of product at the beginning of the year.