Chapter 8: Cost-Volume-Profit Analysis

MULTIPLE CHOICE UE!TIO"!

1. CVP analysis can be used to study the effect of:
A. changes in selling prices on a company's profitability.
B. changes in variable costs on a company's profitability.
C. changes in fixed costs on a company's profitability.
. changes in product sales mix on a company's profitability.
!. all of the above.
Ans"er: ! #$: 1 %ype: &C
'. %he brea()even point is that level of activity "here:
A. total revenue e*uals total cost.
B. variable cost e*uals fixed cost.
C. total contribution margin e*uals the sum of variable cost plus fixed cost.
. sales revenue e*uals total variable cost.
!. profit is greater than +ero.
Ans"er: A #$: 1 %ype: &C
,. %he unit contribution margin is calculated as the difference bet"een:
A. selling price and fixed cost per unit.
B. selling price and variable cost per unit.
C. selling price and product cost per unit.
. fixed cost per unit and variable cost per unit.
!. fixed cost per unit and product cost per unit.
Ans"er: B #$: 1 %ype: &C
-. .hich of the follo"ing "ould produce the largest increase in the contribution margin per unit/
A. A 01 increase in selling price.
B. A 121 decrease in selling price.
C. A 1-1 increase in variable cost.
. A 101 decrease in fixed cost.
!. A ',1 increase in the number of units sold.
Ans"er: A #$: 1 %ype: 3
Chapter 8 199
2. .hich of the follo"ing "ould ta(e place if a company "ere able to reduce its variable cost per
unit/
Contribution
4argin
Brea()even
Point
A. 5ncrease 5ncrease
B. 5ncrease ecrease
C. ecrease 5ncrease
. ecrease ecrease
!. 5ncrease 3o effect
Ans"er: B #$: 1 %ype: 3
6. .hich of the follo"ing "ould ta(e place if a company experienced an increase in fixed costs/
A. 3et income "ould increase.
B. %he brea()even point "ould increase.
C. %he contribution margin "ould increase.
. %he contribution margin "ould decrease.
!. 4ore than one of the above events "ould occur.
Ans"er: B #$: 1 %ype: 3
0. Assuming no change in sales volume7 an increase in a firm's per)unit contribution margin "ould:
A. increase net income.
B. decrease net income.
C. have no effect on net income.
. increase fixed costs.
!. decrease fixed costs.
Ans"er: A #$: 1 %ype: 3
8. A company that desires to lo"er its brea()even point should strive to:
A. decrease selling prices.
B. reduce variable costs.
C. increase fixed costs.
. sell more units.
!. pursue more than one of the above actions.
Ans"er: B #$: 1 %ype: 3
9. A company has fixed costs of :9;; and a per)unit contribution margin of :,. .hich of the
follo"ing statements is <are= true/
A. !ach unit >contributes> :, to"ard covering the fixed costs of :9;;.
B. %he situation described is not possible and there must be an error.
C. $nce the brea()even point is reached7 the company "ill ma(e money at the rate of :, per
unit.
. %he firm "ill definitely lose money in this situation.
!. ?tatements >A> and >C> are true.
Ans"er: ! #$: 1 %ype: 3
200 Hilton, Managerial Accounting, Seventh Edition
1;. ?anderson sells a single product for :2; that has a variable cost of :,;. @ixed costs amount to :2
per unit "hen anticipated sales targets are met. 5f the company sells one unit in excess of its
brea()even volume7 the bottom)line profit "ill be:
A. :12.
B. :';.
C. :2;.
. an amount that cannot be derived based on the information presented.
!. an amount other than those in choices >A7> >B7> and >C> but one that can be derived based on
the information presented.
Ans"er: B #$: 1 %ype: A
11. At a volume of 127;;; units7 Boston reported sales revenues of :6;;7;;;7 variable costs of
:''27;;;7 and fixed costs of :1';7;;;. %he company's contribution margin per unit is:
A. :10.
B. :'2.
C. :-0.
. :22.
!. an amount other than those above.
Ans"er: B #$: 1 %ype: A
1'. A recent income statement of Ban(s Corporation reported the follo"ing data:
?ales revenue :87;;;7;;;
Variable costs 27;;;7;;;
@ixed costs '7';;7;;;
5f these data are based on the sale of ';7;;; units7 the contribution margin per unit "ould be:
A. :-;.
B. :12;.
C. :'9;.
. :,6;.
!. an amount other than those above.
Ans"er: B #$: 1 %ype: A
Chapter 8 201
1,. A recent income statement of @ox Corporation reported the follo"ing data:
?ales revenue :,76;;7;;;
Variable costs 176;;7;;;
@ixed costs 17;;;7;;;
5f these data are based on the sale of 1;7;;; units7 the brea()even point "ould be:
A. '7;;; units.
B. '7008 units.
C. ,76;; units.
. 27;;; units.
!. an amount other than those above.
Ans"er: #$: 1 %ype: A
1-. A recent income statement of Aale Corporation reported the follo"ing data:
?ales revenue :'72;;7;;;
Variable costs 172;;7;;;
@ixed costs 8;;7;;;
5f these data are based on the sale of 27;;; units7 the brea()even sales "ould be:
A. :'7;;;7;;;.
B. :'7';67;;;.
C. :'72;;7;;;.
. :1;7;;;7;;;.
!. an amount other than those above.
Ans"er: A #$: 1 %ype: A
12. #a"ton7 5nc.7 sells a single product for :1'. Variable costs are :8 per unit and fixed costs total
:,6;7;;; at a volume level of 6;7;;; units. Assuming that fixed costs do not change7 #a"ton's
brea()even point "ould be:
A. ,;7;;; units.
B. -27;;; units.
C. 9;7;;; units.
. negative because the company loses :' on every unit sold.
!. a positive amount other than those given above.
Ans"er: C #$: 1 %ype: A
202 Hilton, Managerial Accounting, Seventh Edition
16. Breen7 5nc.7 sells a single product for :';. Variable costs are :8 per unit and fixed costs total
:1';7;;; at a volume level of 27;;; units. Assuming that fixed costs do not change7 Breen's
brea()even sales "ould be:
A. :16;7;;;.
B. :';;7;;;.
C. :,;;7;;;.
. :-8;7;;;.
!. an amount other than those above.
Ans"er: B #$: 1 %ype: A
10. $rion recently reported sales revenues of :8;;7;;;7 a total contribution margin of :,;;7;;;7 and
fixed costs of :18;7;;;. 5f sales volume amounted to 1;7;;; units7 the company's variable cost
per unit must have been:
A. :1'.
B. :,'.
C. :2;.
. :9'.
!. an amount other than those above.
Ans"er: C #$: 1 %ype: A
18. ?trand has a brea()even point of 1';7;;; units. 5f the firm's sole product sells for :-; and fixed
costs total :-8;7;;;7 the variable cost per unit must be:
A. :-.
B. :,6.
C. :--.
. an amount that cannot be derived based on the information presented.
!. an amount other than those in choices >A7> >B7> and >C> but one that can be derived based on
the information presented.
Ans"er: B #$: 1 %ype: A
19. &ibco Co.7 ma(es and sells only one product. %he unit contribution margin is :6 and the brea()
even point in unit sales is '-7;;;. %he company's fixed costs are:
A. :-7;;;.
B. :1-7-;;.
C. :-;7;;;.
. :1--7;;;.
!. an amount other than those above.
Ans"er: #$: 1 %ype: A
Chapter 8 203
';. %he contribution)margin ratio is:
A. the difference bet"een the selling price and the variable cost per unit.
B. fixed cost per unit divided by variable cost per unit.
C. variable cost per unit divided by the selling price.
. unit contribution margin divided by the selling price.
!. unit contribution margin divided by fixed cost per unit.
Ans"er: #$: ' %ype: &C
'1. At a volume level of 2;;7;;; units7 ?ullivan reported the follo"ing information:
?ales price :6;
Variable cost per unit ';
@ixed cost per unit -
%he company's contribution)margin ratio is:
A. ;.,,.
B. ;.-;.
C. ;.6;.
. ;.60.
!. an amount other than those above.
Ans"er: #$: ' %ype: A
''. .hich of the follo"ing expressions can be used to calculate the brea()even point "ith the
contribution)margin ratio <C4&=/
A. C4& C fixed costs.
B. C4& x fixed costs.
C. @ixed costs C C4&.
. <@ixed costs D variable costs= x C4&.
!. <?ales revenue ) variable costs= C C4&.
Ans"er: C #$: ' %ype: &C
204 Hilton, Managerial Accounting, Seventh Edition
Ese the follo"ing to ans"er *uestions ',),;:
C o s t - V o l u m e - P r o f i t G r a p h
$ 1 0 0 , 0 0 0
8 0 , 0 0 0
6 0 , 0 0 0
4 0 , 0 0 0
2 0 , 0 0 0
0 1 , 0 0 0 2 , 0 0 0 3 , 0 0 0 4 , 0 0 0 5 , 0 0 0 U n i t s

!
C
G
"
#
$
%
',. #ine A is the:
A. total revenue line.
B. fixed cost line.
C. variable cost line.
. total cost line.
!. profit line.
Ans"er: A #$: , %ype: &C
'-. #ine C represents the level of:
A. fixed cost.
B. variable cost.
C. semivariable cost.
. total cost.
!. mixed cost.
Ans"er: A #$: , %ype: &C
'2. %he slope of line A is e*ual to the:
A. fixed cost per unit.
B. selling price per unit.
C. profit per unit.
. semivariable cost per unit.
!. unit contribution margin.
Ans"er: B #$: , %ype: &C
Chapter 8 205
'6. %he slope of line B is e*ual to the:
A. fixed cost per unit.
B. selling price per unit.
C. variable cost per unit.
. profit per unit.
!. unit contribution margin.
Ans"er: C #$: , %ype: &C
'0. %he vertical distance bet"een the total cost line and the total revenue line represents:
A. fixed cost.
B. variable cost.
C. profit or loss at that volume.
. semivariable cost.
!. the safety margin.
Ans"er: C #$: , %ype: &C
'8. Assume that the firm "hose cost structure is depicted in the figure expects to produce a loss for
the upcoming period. %he loss "ould be sho"n on the graph:
A. by the area immediately above the brea()even point.
B. by the area immediately belo" the total cost line.
C. by the area diagonally to the right of the brea()even point.
. by the area diagonally to the left of the brea()even point.
!. in some other area not mentioned above.
Ans"er: #$: , %ype: &C
'9. At a given sales volume7 the vertical distance bet"een the fixed cost line and the total cost line
represents:
A. fixed cost.
B. variable cost.
C. profit or loss at that volume.
. semivariable cost.
!. the safety margin.
Ans"er: B #$: , %ype: &C
,;. Assume that the firm "hose cost structure is depicted in the figure expects to produce a profit for
the upcoming accounting period. %he profit "ould be sho"n on the graph by the letter:
A. .
B. !.
C. @.
. B.
!. F.
Ans"er: #$: , %ype: &C
20 Hilton, Managerial Accounting, Seventh Edition
Ese the follo"ing to ans"er *uestions ,1),':
2 , 0 0 0 4 , 0 0 0 6 , 0 0 0 U n i t s
"
$ 4 0 , 0 0 0
2 0 , 0 0 0
0
2 0 , 0 0 0
4 0 , 0 0 0
6 0 , 0 0 0
P r o f i t - V o l u m e G r a p h
,1. #ine A is the:
A. fixed cost line.
B. variable cost line.
C. total cost line.
. total revenue line.
!. profit line.
Ans"er: ! #$: , %ype: 3
,'. %he triangular area bet"een the hori+ontal axis and #ine A7 to the right of -7;;;7 represents:
A. fixed cost.
B. variable cost.
C. profit.
. loss.
!. sales revenue.
Ans"er: C #$: , %ype: &C
Chapter 8 20!
,,. A recent income statement of $slo Corporation reported the follo"ing data:
Enits sold 87;;;
?ales revenue :07';;7;;;
Variable costs -7;;;7;;;
@ixed costs 176;;7;;;
5f the company desired to earn a target net profit of :-8;7;;;7 it "ould have to sell:
A. 17';; units.
B. '78;; units.
C. -7;;; units.
. 27';; units.
!. an amount other than those above.
Ans"er: #$: - %ype: A
,-. Aello"7 5nc.7 sells a single product for :1;. Variable costs are :- per unit and fixed costs total
:1';7;;; at a volume level of 1;7;;; units. .hat dollar sales level "ould Aello" have to
achieve to earn a target net profit of :'-;7;;;/
A. :-;;7;;;.
B. :2;;7;;;.
C. :6;;7;;;.
. :02;7;;;.
!. :9;;7;;;.
Ans"er: C #$: - %ype: A
Ese the follo"ing to ans"er *uestions ,2),0:
Archie sells a single product for :2;. Variable costs are 6;1 of the selling price7 and the company has
fixed costs that amount to :-;;7;;;. Current sales total 167;;; units.
,2. Archie:
A. "ill brea()even by selling 87;;; units.
B. "ill brea()even by selling 1,7,,, units.
C. "ill brea()even by selling ';7;;; units.
. "ill brea()even by selling 17;;;7;;; units.
!. cannot brea()even because it loses money on every unit sold.
Ans"er: C #$: 1 %ype: A
,6. !ach unit that the company sells "ill:
A. increase overall profitability by :';.
B. increase overall profitability by :,;.
C. increase overall profitability by :2;.
. increase overall profitability by some other amount.
!. decrease overall profitability by :2.
Ans"er: A #$: 1 %ype: A
208 Hilton, Managerial Accounting, Seventh Edition
Chapter 8 209
,0. 5n order to produce a target profit of :''7;;;7 Archie's dollar sales must total:
A. :87--;.
B. :'171;;.
C. :17;;;7;;;.
. :17;227;;;.
!. an amount other than those above.
Ans"er: #$: - %ype: A
,8. %he difference bet"een budgeted sales revenue and brea()even sales revenue is the:
A. contribution margin.
B. contribution)margin ratio.
C. safety margin.
. target net profit.
!. operating leverage.
Ans"er: C #$: - %ype: &C
,9. 4axie's budget for the upcoming year revealed the follo"ing figures:
?ales revenue :8-;7;;;
Contribution margin 2;-7;;;
3et income 2-7;;;
5f the company's brea()even sales total :02;7;;;7 4axie's safety margin "ould be:
A. :<9;7;;;=.
B. :9;7;;;.
C. :'-67;;;.
. :,,67;;;.
!. :6967;;;.
Ans"er: B #$: - %ype: A
-;. 5f a company desires to increase its safety margin7 it should:
A. increase fixed costs.
B. decrease the contribution margin.
C. decrease selling prices7 assuming the price change "ill have no effect on demand.
. stimulate sales volume.
!. attempt to raise the brea()even point.
Ans"er: #$: - %ype: 3
210 Hilton, Managerial Accounting, Seventh Edition
-1. ana sells a single product at :'; per unit. %he firm's most recent income statement revealed
unit sales of 1;;7;;;7 variable costs of :8;;7;;;7 and fixed costs of :-;;7;;;. 5f a :- drop in
selling price "ill boost unit sales volume by ';17 the company "ill experience:
A. no change in profit because a ';1 drop in sales price is balanced by a ';1 increase in
volume.
B. an :8;7;;; drop in profitability.
C. a :'-;7;;; drop in profitability.
. a :-;;7;;; drop in profitability.
!. a change in profitability other than those above.
Ans"er: C #$: - %ype: A
-'. Brimes is studying the profitability of a change in operation and has gathered the follo"ing
information:
Current
$peration
Anticipated
$peration
@ixed costs :,87;;; :-87;;;
?elling price :16 :''
Variable cost :1; :1'
?ales <units= 97;;; 67;;;
?hould Brimes ma(e the change/
A. Aes7 the company "ill be better off by :67;;;.
B. 3o7 because sales "ill drop by ,7;;; units.
C. 3o7 because the company "ill be "orse off by :-7;;;.
. 3o7 because the company "ill be "orse off by :''7;;;.
!. 5t is impossible to Gudge because additional information is needed.
Ans"er: C #$: - %ype: A
-,. Bleason sells a single product at :1- per unit. %he firm's most recent income statement revealed
unit sales of 8;7;;;7 variable costs of :8;;7;;;7 and fixed costs of :26;7;;;. 4anagement
believes that a :, drop in selling price "ill boost unit sales volume by ';1. .hich of the
follo"ing correctly depicts ho" these t"o changes "ill affect the company's brea()even point/
rop in
?ales Price
5ncrease in
?ales Volume
A. 5ncrease 5ncrease
B. 5ncrease ecrease
C. 5ncrease 3o effect
. ecrease 5ncrease
!. ecrease ecrease
Ans"er: C #$: - %ype: A
Chapter 8 211
--. All other things being e*ual7 a company that sells multiple products should attempt to structure its
sales mix so the greatest portion of the mix is composed of those products "ith the highest:
A. selling price.
B. variable cost.
C. contribution margin.
. fixed cost.
!. gross margin.
Ans"er: C #$: 2 %ype: 3
-2. $'ell sells three products: &7 ?7 and %. Budgeted information for the upcoming accounting
period follo"s.
Product ?ales Volume <Enits= ?elling Price Variable Cost
& 167;;; :1- :9
? 1'7;;; 1; 6
% 2'7;;; 11 8
%he company's "eighted)average unit contribution margin is:
A. :,.;;.
B. :,.22.
C. :-.;;.
. :19.,2.
!. an amount other than those above.
Ans"er: B #$: 2 %ype: A
-6. .ells Corporation has the follo"ing sales mix for its three products: A7 ';1H B7 ,21H and C7
-21. @ixed costs total :-;;7;;; and the "eighted)average contribution margin is :1;;. Fo"
many units of product A must be sold to brea()even/
A. 8;;.
B. -7;;;.
C. ';7;;;.
. An amount other than those above.
!. Cannot be determined based on the information presented.
Ans"er: A #$: 2 %ype: A
212 Hilton, Managerial Accounting, Seventh Edition
Ese the follo"ing to ans"er *uestions -0)2;:
#amar I Co.7 ma(es and sells t"o types of shoes7 Plain and @ancy. ata concerning these products are
as follo"s:
Plain @ancy
Enit selling price :';.;
;
:,2.;
;
Variable cost per unit 1'.;; '-.2
;
?ixty percent of the unit sales are Plain7 and annual fixed expenses are :-27;;;.
-0. %he "eighted)average unit contribution margin is:
A. :-.8;.
B. :9.;;.
C. :9.'2.
. :10.;;.
!. an amount other than those above.
Ans"er: B #$: 2 %ype: A
-8. Assuming that the sales mix remains constant7 the total number of units that the company must
sell to brea( even is:
A. '7-,'.
B. '76-0.
C. -70,0.
. 27;;;.
!. an amount other than those above.
Ans"er: #$: 2 %ype: A
-9. Assuming that the sales mix remains constant7 the number of units of Plain that the company
must sell to brea( even is:
A. '7;;;.
B. ,7;;;.
C. ,7,02.
. 27;;;.
!. 276'2.
Ans"er: B #$: 2 %ype: A
2;. Assuming that the sales mix remains constant7 the number of units of @ancy that the company
must sell to brea( even is:
A. '7;;;.
B. ,7;;;.
C. ,7,02.
. 27;;;.
!. 276'2.
Chapter 8 213
Ans"er: A #$: 2 %ype: A
214 Hilton, Managerial Accounting, Seventh Edition
21. .hich of the follo"ing underlying assumptions form<s= the basis for cost)volume)profit analysis/
A. &evenues and costs behave in a linear manner.
B. Costs can be categori+ed as variable7 fixed7 or semivariable.
C. .or(er efficiency and productivity remain constant.
. 5n multiproduct organi+ations7 the sales mix remains constant.
!. All of the above are assumptions that underlie cost)volume)profit analysis.
Ans"er: ! #$: 6 %ype: &C
2'. Cost)volume)profit analysis is based on certain general assumptions. .hich of the follo"ing is
not one of these assumptions/
A. Product prices "ill remain constant as volume varies "ithin the relevant range.
B. Costs can be categori+ed as fixed7 variable7 or semivariable.
C. %he efficiency and productivity of the production process and "or(ers "ill change to reflect
manufacturing advances.
. %otal fixed costs remain constant as activity changes.
!. Enit variable cost remains constant as activity changes.
Ans"er: C #$: 6 %ype: &C
2,. %he assumptions on "hich cost)volume)profit analysis is based appear to be most valid for
businesses:
A. over the short run.
B. over the long run.
C. over both the short run and the long run.
. in periods of sustained profits.
!. in periods of increasing sales.
Ans"er: A #$: 6 %ype: 3
2-. %he contribution income statement differs from the traditional income statement in "hich of the
follo"ing "ays/
A. %he traditional income statement separates costs into fixed and variable components.
B. %he traditional income statement subtracts all variable costs from sales to obtain the
contribution margin.
C. Cost)volume)profit relationships can be analy+ed more easily from the contribution income
statement.
. %he effect of sales volume changes on profit is readily apparent on the traditional income
statement.
!. %he contribution income statement separates costs into product and period categories.
Ans"er: C #$: 0 %ype: &C
Chapter 8 215
22. .hich of the follo"ing does not typically appear on a contribution income statement/
A. 3et income.
B. Bross margin.
C. Contribution margin.
. %otal variable costs.
!. %otal fixed costs.
Ans"er: B #$: 0 %ype: &C
26. .hich of the follo"ing does not typically appear on an income statement prepared by using a
traditional format/
A. Cost of goods sold.
B. Contribution margin.
C. Bross margin.
. ?elling expenses.
!. Administrative expenses.
Ans"er: B #$: 0 %ype: &C
20. %he extent to "hich an organi+ation uses fixed costs in its cost structure is measured by:
A. financial leverage.
B. operating leverage.
C. fixed cost leverage.
. contribution leverage.
!. efficiency leverage.
Ans"er: B #$: 8 %ype: &C
28. A manager "ho "ants to determine the percentage impact on net income of a given percentage
change in sales "ould multiply the percentage increaseJdecrease in sales revenue by the:
A. contribution margin.
B. gross margin.
C. operating leverage factor.
. safety margin.
!. contribution)margin ratio.
Ans"er: C #$: 8 %ype: &C
29. .hich of the follo"ing calculations can be used to measure a company's degree of operating
leverage/
A. Contribution margin C sales.
B. Contribution margin C net income.
C. ?ales C contribution margin.
. ?ales C net income.
!. ?ales C fixed costs.
Ans"er: B #$: 8 %ype: &C
21 Hilton, Managerial Accounting, Seventh Edition
6;. Aou are analy+ing Bec(er Corporation and 3e"ton Corporation and have concluded that Bec(er
has a higher operating leverage factor than 3e"ton. .hich one of the follo"ing choices
correctly depicts <1= the relative use of fixed costs <as opposed to variable costs= for the t"o
companies and <'= the percentage change in income caused by a change in sales/
&elative Ese of @ixed
Costs as $pposed to
Variable Costs
Percentage Change in
5ncome Caused by
a Change in ?ales
A. Breater for Bec(er Breater for Bec(er
B. Breater for Bec(er #o"er for Bec(er
C. Breater for Bec(er !*ual for both
. #o"er for Bec(er Breater for Bec(er
!. #o"er for Bec(er #o"er for Bec(er
Ans"er: A #$: 8 %ype: &C
61. %he follo"ing information relates to ay Company:
?ales revenue :1'7;;;7;;;
Contribution margin -78;;7;;;
3et income 8;;7;;;
ay's operating leverage factor is:
A. ;.;60.
B. ;.160.
C. ;.-;;.
. '.2;;.
!. 6.;;;.
Ans"er: ! #$: 8 %ype: A
6'. %he follo"ing information relates to Paterno Company:
?ales revenue :1;7;;;7;;;
Contribution margin -7;;;7;;;
3et income 17;;;7;;;
5f a manager at Paterno desired to determine the percentage impact on net income of a given
percentage change in sales7 the manager "ould multiply the percentage increaseJdecrease in sales
revenue by:
A. ;.'2.
B. ;.-;.
C. '.2;.
. -.;;.
!. 1;.;;.
Ans"er: #$: 8 %ype: A7 3
Chapter 8 21!
Ese the follo"ing to ans"er *uestions 6,)6-:
!dco Company produced and sold -27;;; units of a single product last year7 "ith the follo"ing results:
?ales revenue :17,2;7;;;
4anufacturing costs:
Variable 2827;;;
@ixed '0;7;;;
?elling costs:
Variable -;72;;
@ixed 2-7;;;
Administrative costs:
Variable 18-72;;
@ixed 1;87;;;
6,. !dco's operating leverage factor "as:
A. -.
B. 2.
C. 6.
. 0.
!. 8.
Ans"er: B #$: 8 %ype: A
6-. 5f !dco's sales revenues increase 1217 "hat "ill be the percentage increase in income before
income taxes/
A. 121.
B. -21.
C. 6;1.
. 021.
!. An amount other than those above.
Ans"er: #$: 8 %ype: A
62. .hen advanced manufacturing systems are installed7 "hat effect does such installation usually
have on fixed costs and the brea()even point/
@ixed Costs Brea()even Point
A. 5ncrease 5ncrease
B. 5ncrease ecrease
C. ecrease 5ncrease
. ecrease ecrease
!. o not change oes not change
Ans"er: A #$: 8 %ype: &C
218 Hilton, Managerial Accounting, Seventh Edition
66. .hich of the follo"ing statements is <are= true regarding a company that has implemented
flexible manufacturing systems and activity)based costing/
5.%he company has erred7 as these t"o practices used in conGunction "ith one another "ill
severely limit the firm's ability to analy+e costs over the relevant range.
55.Costs formerly vie"ed as fixed under traditional)costing systems may no" be considered
variable "ith respect to changes in cost drivers such as number of setups7 number of
material moves7 and so forth.
555.As compared "ith the results obtained under a traditional)costing system7 the concept of
brea()even analysis loses meaning.
A. 5 only.
B. 55 only.
C. 555 only.
. 5 and 55.
!. 55 and 555.
Ans"er: B #$: 1; %ype: 3
60. A company7 subGect to a -;1 tax rate7 desires to earn :2;;7;;; of after)tax income. Fo" much
should the firm add to fixed costs "hen figuring the sales revenues necessary to produce this
income level/
A. :';;7;;;.
B. :,;;7;;;.
C. :2;;7;;;.
. :8,,7,,,.
!. :17'2;7;;;.
Ans"er: #$: 11 %ype: A
68. Barney7 5nc.7 is subGect to a -;1 income tax rate. %he follo"ing data pertain to the period Gust
ended "hen the company produced and sold -27;;; units:
?ales revenue :17,2;7;;;
Variable costs 81;7;;;
@ixed costs -,'7;;;
Fo" many units must Barney sell to earn an after)tax profit of :18;7;;;/
A. -'7;;;.
B. -27;;;.
C. 217;;;.
. 617;;;.
!. An amount other than those above.
Ans"er: #$: 11 %ype: A
Chapter 8 219
E#E$CI!E!
%asi& CVP $elationships
69. Vince's Pi++a delivers pi++as to dormitories and apartments near a maGor state university. %he
company's annual fixed costs are :-87;;;. %he sales price averages :97 and it costs the company
:, to ma(e and deliver each pi++a.
&e*uired:
A. Fo" many pi++as must Vince's sell to brea( even/
B. Fo" many pi++as must the company sell to earn a target net profit of :2-7;;;/
C. 5f budgeted sales total 979;; pi++as7 ho" much is the company's safety margin/
. Vince's assistant manager7 an accounting maGor7 has suggested that the firm should try to
increase the contribution margin per pi++a. !xplain the meaning of >contribution margin> in
layman's terms.
#$: 17 - %ype: &C7 A
Ans"er:
A. ?elling price per pi++a :9
#ess: Variable cost per pi++a ,
Enit contribution margin :6
Brea()even pi++as: :-87;;; :6 K 87;;;
B. Pi++as to earn :2-7;;;: <:-87;;; D :2-7;;;= C :6 K 107;;;
C. ?afety margin: <979;; x :9= ) <87;;; x :9= K :1071;;
. %he contribution margin is the amount that each unit <pi++a= contributes to"ard covering
fixed cost and producing a profit. $nce a company's fixed costs are covered7 operating
income "ill increase by the amount of the contribution margin. 4athematically7 it is
computed as the difference bet"een selling price and the variable cost per unit.
220 Hilton, Managerial Accounting, Seventh Edition
%asi& CVP $elationships
0;. ?eventh Feaven ta(es tourists on helicopter tours of Fa"aii. !ach tourist buys a :12; tic(etH the
variable costs average :6; per person. ?eventh Feaven has annual fixed costs of :0;'7;;;.
&e*uired:
A. Fo" many tours must the company conduct in a month to brea( even/
B. Compute the sales revenue needed to produce a target net profit of :,67;;; per month.
C. Calculate the contribution margin ratio.
. etermine "hether the actions that follo" "ill increase7 decrease7 or not affect the company's
brea()even point.
1.A decrease in tour prices.
'.%he termination of a salaried cler( <no replacement is planned=.
,.A decrease in the number of tours sold.
#$: 17 '7 - %ype: A7 3
Ans"er:
A. ?elling price per tour :12;
#ess: Variable cost per tour 6;
Enit contribution margin : 9;
Brea()even tours: <:0;'7;;; 1' months= :9; K 62;
B. %ours to earn :,67;;;: L<:0;'7;;; C 1' months= D :,67;;;M C :9; K 17;2;
C. Contribution margin ratio: :9; C :12; K ;.6
. 1
.
5ncrease
'
.
ecrease
,
.
3o effect
Chapter 8 221
CVP: Analysis of Operations
01. %hompson Company is considering the development of t"o products: no. 62 or no. 66.
4anufacturing cost information follo"s.
3o. 62 3o. 66
Annual fixed costs :'';7;;; :,-;7;;;
Variable cost per unit ,, '2
&egardless of "hich product is introduced7 the anticipated selling price "ill be :2; and the
company "ill pay a 1;1 sales commission on gross dollar sales. %hompson "ill not carry an
inventory of these items.
&e*uired:
A. .hat is the brea()even sales volume <in dollars= on product no. 66/
B. .hich of the t"o products "ill be more profitable at a sales level of '27;;; units/
C. At "hat unit)volume level "ill the profitJloss on product no. 62 e*ual the profitJloss on
product no. 66/
#$: 17 - %ype: A
Ans"er:
A. ?elling price :2;
#ess: Variable cost L:'2 D <:2; x 1;1=M ,;
Enit contribution margin :';
Brea()even units: :,-;7;;; C :'; K 107;;;
Brea()even sales: 107;;; x :2; K :82;7;;;
B. 3o. 62 3o. 66
?alesN :17'2;7;;; :17'2;7;;;
#ess: Variable costsNN 92;7;;; 02;7;;;
Contribution margin : ,;;7;;; : 2;;7;;;
#ess: @ixed costs '';7;;; ,-;7;;;
$perating income : 8;7;;; : 16;7;;;
N'27;;; x :2;
NN3o. 62: '27;;; x L:,, D <:2; x 1;1=MH 3o. 66: '27;;; x L:'2 D <:2; x 1;1=M
Product no. 66 is more profitable: :16;7;;; vs. :8;7;;;
C. O K 3umber of units
<:2; ) :,8=O ) :'';7;;; K <:2; ) :,;=O ) :,-;7;;;
:1'O ) :'';7;;; K :';O ) :,-;7;;;
:8O K :1';7;;;
O K 127;;; units
222 Hilton, Managerial Accounting, Seventh Edition
%rea'-E(en Analysis) *e&ision Ma'in+
0'. %he Bruggs I ?trutton Company manufactures an engine for carpet cleaners called the
>?nooper.> Budgeted cost and revenue data for the >?nooper> are given belo"7 based on sales of
-;7;;; units.
?ales :176;;7;;;
#ess: Cost of goods sold 171';7;;;
Bross margin : -8;7;;;
#ess: $perating expenses 1;;7;;;
3et income : ,8;7;;;
Cost of goods sold consists of :8;;7;;; of variable costs and :,';7;;; of fixed costs. $perating
expenses consist of :-;7;;; of variable costs and :6;7;;; of fixed costs.
&e*uired:
A. Calculate the brea()even point in units and sales dollars.
B. Calculate the safety margin.
C. Bruggs I ?trutton received an order for 67;;; units at a price of :'2.;;. %here "ill be no
increase in fixed costs7 but variable costs "ill be reduced by :;.2- per unit because of
cheaper pac(aging. etermine the proGected increase or decrease in profit from the order.
#$: - %ype: A
Ans"er:
A. ?ales :176;;7;;;
#ess: Variable costs <:8;;7;;; D :-;7;;;= 8-;7;;;
Contribution margin : 06;7;;;
Enit contribution margin: :06;7;;; C -;7;;; units K :19
Brea()even point in units: <:,';7;;; D :6;7;;;= C :19 K ';7;;; units
Enit selling price: :176;;7;;; C -;7;;; units K :-;
Brea()even point in dollars: ';7;;; units x :-; K :8;;7;;;
B. ?afety margin: :176;;7;;; ) :8;;7;;; K :8;;7;;;
C. ?ales <67;;; x :'2= : 12;7;;;
#ess: Variable costs at :';.-6N 1''706;
5ncrease in profit : '07'-;
N<:8;;7;;; D :-;7;;;= C -;7;;; units K :'1.;;H :'1.;; ) :;.2- K :';.-6
Chapter 8 223
Impa&t of Operatin+ Chan+es
0,. $a(mar( recently sold 0;7;;; units7 generating sales revenue of :-79;;7;;;. %he company's
variable cost per unit and total fixed cost amounted to :'; and :'78;;7;;;7 respectively.
4anagement is in the process of studying the dollar impact of various transactions and events7
and desires ans"ers to the follo"ing independent cases:
Ca"e no# 1$ 4anagement "ants to lo"er the firm's brea()even point to 2'7;;; units. All
other things being e*ual7 "hat must happen to fixed costs to achieve this obGective/
Ca"e no# 2$ %he company anticipates a :' hi(e in the variable cost per unit. All other
things being e*ual7 if management desires to (eep the firm's current brea()even point7
"hat must happen to $a(mar('s selling price/ 5f selling price remains constant7 "hat
must happen to the firm's total fixed costs/
&e*uired:
A. Ans"er the t"o cases raised by management.
B. etermine the impact <increase7 decrease7 or no effect= of the follo"ing operating changes on
the items cited:
1. An increase in variable selling costs on net income.
'. A decrease in direct material cost on the unit contribution margin.
,. A decrease in the number of units sold on the brea()even point.
#$: 17 - %ype: A
Ans"er:
A. Case no. 1:
?elling price per unit: :-79;;7;;; C 0;7;;; units K :0;
Enit contribution margin: :0; ) :'; K :2;
Current brea()even point: :'78;;7;;; C :2; K 267;;; units
3e" level of fixed cost: O C :2; K 2'7;;; unitsH O K :'76;;7;;;
@ixed costs must decrease by :';;7;;; <:'78;;7;;; ) :'76;;7;;;=.
Case no. ':
%o (eep the same brea()even point7 the contribution margin must remain at :2;. %hus7 the
selling price must increase to :0' to offset the :' hi(e in variable cost.
Brea()even: @ixed cost C :-8 K 267;;; unitsH fixed cost K :'76887;;;
@ixed costs must fall by :11'7;;; <:'78;;7;;; ) :'76887;;;= if the selling price remains
constant.
B. 1. ecrease
'. 5ncrease
,. 3o effect
224 Hilton, Managerial Accounting, Seventh Edition
Impa&t of Operatin+ Chan+es
0-. .ilcox Company is studying the impact of the follo"ing:
1.An increase in sales price.
'.An increase in the variable cost per unit.
,. An increase in the number of units sold <note: each unit produces a :6 contribution
margin=.
-. A decrease in fixed costs.
2. A proposed change in the method of compensation for salespeople7 a"ay from
commissions based on gross sales dollars and to"ard higher monthly salaries.
&e*uired:
etermine the impact of each of these operating changes on .ilcox's per)unit contribution
margin and brea()even point by completing the chart that follo"s. Aour responses should be
5ncrease <53C=7 ecrease <!C=7 3o !ffect <3!=7 or 5nsufficient 5nformation to Pudge <55=.
Per)Enit
Contribution
4argin
Brea()!ven
Point
1
.
QQQQQQ QQQQQQ
'
.
QQQQQQ QQQQQQ
,
.
QQQQQQ QQQQQQ
-
.
QQQQQQ QQQQQQ
2
.
QQQQQQ QQQQQQ
#$: 17 - %ype: 3
Ans"er:
Per)Enit
Contribution
4argin
Brea()!ven
Point
1. 53C !C
'. !C 53C
,. 3! 3!
-. 3! !C
2. 53C 55
Chapter 8 225
Impa&t of Operatin+ Chan+es
02. Bladstone Company is studying the impact of the follo"ing:
1. An increase in sales price on the brea()even point.
'. A decrease in fixed costs on the contribution margin.
,. An increase in the contribution margin on the brea()even point.
-. A decrease in the variable cost per unit on the sales volume needed to achieve
Bladstone's :687;;; target net profit.
2. An increase in sales commissions on the brea()even point and the contribution margin.
6. A decrease in anticipated advertising outlays on fixed cost and the brea()even point.
&e*uired:
etermine the impact of these operating changes <increase7 decrease7 no effect= on the item<s=
noted.
#$: 17 - %ype: 3
Ans"er:
1. ecrease -
.
ecrease
'. 3o effect 2
.
5ncrease7 decrease
,. ecrease 6
.
ecrease7 decrease
22 Hilton, Managerial Accounting, Seventh Edition
Cost-Volume-Profit Analysis) Multiple Pro,u&ts
06. Boise Company manufactures and sells three products: Bood7 Better7 and Best. Annual fixed
costs are :,7,127;;;7 and data about the three products follo".
Bood Better Best
?ales mix in units ,;1 2;1 ';1
?elling price :'2; :,2; :2;
;
Variable cost 1;; 12; '2;
&e*uired:
A. etermine the "eighted)average unit contribution margin.
B. etermine the brea()even volume in units for each product.
C. etermine the total number of units that must be sold to obtain a profit for the company of
:',-7;;;.
. Assume that the sales mix for Bood7 Better7 and Best is changed to 2;17 ,;17 and ';17
respectively. .ill the number of units re*uired to brea()even increase or decrease/ !xplain.
Fint: etailed calculations are not needed to obtain the proper solution.
#$: 2 %ype: A7 3
Ans"er:
A. Bood Better Best
?elling price :'2; :,2; :2;;
#ess: Variable cost 1;; 12; '2;
Contribution margin :12; :';; :'2;
Bood: :12; x ,;1 : -2
Better: :';; x 2;1 1;;
Best: :'2; x ';1 2;
.eighted)average C4 :192
B. Brea()even volume: :,7,127;;; C :192 K 107;;; units
Bood: 107;;; x ,;1 K 271;; units
Better: 107;;; x 2;1 K 872;; units
Best: 107;;; x ';1 K ,7-;; units
C. Volume to earn :',-7;;;: <:,7,127;;; D :',-7;;;= :192 K 187';; units
. %he number of units re*uired "ould increase since a greater proportion of lo"er)
contribution)margin units <specifically7 Bood= "ould be sold.
Chapter 8 22!
Cost-Volume-Profit Analysis) Multiple Pro,u&ts
00. Alphabet Corporation sells three products: P7 R7 and #. %he follo"ing information "as ta(en
from a recent budget:
P R #
Enit sales -;7;;; 1,;7;;; ,;7;;;
?elling price :6; :8; :02
Variable cost -; 62 2;
%otal fixed costs are anticipated to be :'7-2;7;;;.
&e*uired:
A. etermine Alphabet's sales mix.
B. etermine the "eighted)average contribution margin.
C. Calculate the number of units of P7 R7 and # that must be sold to brea( even.
. 5f Alphabet desires to increase company profitability7 should it attempt to increase or
decrease the sales of product R relative to those of P and #/ Briefly explain.
#$: 2 %ype: A7 3
Ans"er:
A. ?ales mix: -;7;;; D 1,;7;;; D ,;7;;; K ';;7;;; units
P: -;7;;; C ';;7;;; K ';1
R: 1,;7;;; C ';;7;;; K 621
#: ,;7;;; C ';;7;;; K 121
B. Enit contribution margins:
P R #
?elling price :6; :8; :02
#ess: Variable cost -; 62 2;
Contribution margin :'; :12 :'2
P: :'; x ';1 : -.;;
R: :12 x 621 9.02
#: :'2 x 121 ,.02
.eighted)average C4 :10.2;
C. Brea()even volume: :'7-2;7;;; C :10.2; K 1-;7;;; units
P: 1-;7;;; x ';1 K '87;;; units
R: 1-;7;;; x 621 K 917;;; units
#: 1-;7;;; x 121 K '17;;; units
. As measured in units7 R has 621 of the company's sales mix. Enfortunately7 though7 R is
Alphabet's least profitable product <:12 contribution margin vs. :'; and :'2=. %o increase
overall profitability7 the firm should strive to decrease sales of R relative to those of P and #.
228 Hilton, Managerial Accounting, Seventh Edition
Tra,itional an, Contri-ution In&ome !tatements
08. Price Publications7 5nc.7 produces and sells business boo(s. %he results of the company's
operations for the year ended ecember ,17 ';x17 are given belo".
?ales revenue :-;;7;;;
4anufacturing costs:
@ixed 1;;7;;;
Variable ';;7;;;
?elling costs:
@ixed 1;7;;;
Variable ';7;;;
Administrative costs:
@ixed '-7;;;
Variable 67;;;
&e*uired:
A. Prepare a traditional income statement for the company.
B. Prepare a contribution income statement for the company.
C. .hich income statement <traditional or contribution= "ould an operating manager most li(ely
use to study changes in operating income that are caused by changes in sales/ .hy/
#$: 0 %ype: A7 3
Ans"er:
A. ?ales :-;;7;;;
#ess: Cost of goods sold ,;;7;;;
Bross margin :1;;7;;;
#ess operating expenses:
?elling :,;7;;;
Administrative ,;7;;; 6;7;;;
3et income : -;7;;;
B. ?ales :-;;7;;;
#ess variable expenses:
4anufacturing :';;7;;;
?elling ';7;;;
Administrative 67;;; ''67;;;
Contribution margin :10-7;;;
#ess fixed expenses:
4anufacturing :1;;7;;;
?elling 1;7;;;
Administrative '-7;;; 1,-7;;;
3et income : -;7;;;
C. %he contribution statement "ould be used because the fixed and variable costs must be
separated in order to measure the effect of a volume change on total costs.
Enfortunately7 a traditional income statement does not provide the necessary
information.
Chapter 8 229
Tra,itional an, Contri-ution In&ome Computations
09. Figh Point Corporation reported sales revenues of :1782;7;;; for the period Gust ended. Cost of
goods sold7 selling expenses7 and administrative expenses totaled :17';;7;;;7 :'8;7;;;7 and
:10;7;;;7 respectively. A detailed analysis of the latter three amounts revealed respective fixed
cost components of :08;7;;;7 :6;7;;;7 and :1,;7;;;.
&e*uired:
A. etermine the amounts that Figh Point "ould report on a traditional income statement for <1=
gross margin7 <'= contribution margin7 and <,= net income.
B. etermine the amounts that Figh Point "ould report on a contribution income statement for
<1= gross margin7 <'= contribution margin7 and <,= net income.
C. .hich of the t"o income statements <traditional or contribution= is more useful for studying a
company's cost)volume)profit relationships.
#$: 0 %ype: A7 3
Ans"er:
A. 1
.
?ales <:1782;7;;;= ) cost of goods sold <:17';;7;;;= K gross margin <:62;7;;;=
'
.
:;. %he contribution margin is not disclosed on a traditional income statement.
,
.
Bross margin <:62;7;;;= ) selling expenses <:'8;7;;;= ) administrative expenses
<:10;7;;;= K net income <:';;7;;;=
B. 1
.
:;. Bross margin is not disclosed on a contribution income statement.
'
.
Variable expenses K total expenses ) fixed expenses:
Cost of goods sold: :17';;7;;; ) :08;7;;; :-';7;;;
?elling expenses: :'8;7;;; ) :6;7;;; '';7;;;
Administrative expenses: :10;7;;; ) :1,;7;;; -;7;;;
%otal variable expenses :68;7;;;
?ales <:1782;7;;;= ) variable expenses <:68;7;;;= K contribution margin <:1710;7;;;=
,
.
Contribution margin <:1710;7;;;= ) fixed expenses <:08;7;;; D :6;7;;; D :1,;7;;; K
:90;7;;;= K net income <:';;7;;;=
C. Contribution income statement
230 Hilton, Managerial Accounting, Seventh Edition
Cost !tru&ture) Operatin+ Le(era+e
8;. $nce upon a time7 t"o brothers <Barry and #arry= dreamt about o"ning and operating companies
in the same line of business. Barry believed in maintaining a very large7 highly efficient manual
labor forceH #arry7 on the other hand7 favored automated)production processes. $ne business "as
located in 4adison and the other "as located in Austin. &ecent data follo".
4adison Austin
?ales :'7;;;7;;; :'7;;;7;;
;
Contribution margin 170;;7;;; -;;7;;;
3et income 12;7;;; 12;7;;;
&e*uired:
A. .hich of the t"o businesses7 4adison or Austin7 has the highest level of <1= variable cost and
<'= highest level of fixed cost/ !xplain ho" you determined your ans"er.
B. etermine the probable o"ner of the firm located in <1= 4adison and <'= Austin. Briefly
explain your logic.
C. Compute the operating leverage factor for 4adison and Austin.
. ?uppose that both 4adison and Austin had the opportunity to increase sales by 1;1. .hich
of the t"o locations "ould experience a larger percentage change in net income/ .hy/
#$: 8 %ype: A7 3
Ans"er:
A. Biven that both locations have identical sales7 Austin has a higher level of variable cost
<:176;;7;;; vs. :,;;7;;;= as indicated by a smaller contribution margin. 4adison7 in
contrast7 has a higher amount of fixed cost <:1722;7;;; vs. :'2;7;;;= because of the larger
contribution margin and a net income e*ual to that of Austin.
B. $perations "ith si+able labor forces have high variable costsH conversely7 automated facilities
give rise to high fixed costs <e.g.7 depreciation7 lease payments7 maintenance=. %hus7 Barry's
philosophy is most closely associated "ith the Austin facility7 and #arry's seems consistent
"ith the cost structure in 4adison.
C. 4adison: :170;;7;;; C :12;7;;; K 11.,,
Austin: :-;;7;;; C :12;7;;; K '.60
. 4adison "ould experience a larger percentage change in net income because it is more
highly leveraged than Austin. 4athematically7 the percentage change in income can be
computed by multiplying the operating leverage factor by the percentage change in sales
revenue.
Chapter 8 231
Operatin+ Le(era+e
81. 4etropolitan !nterprises is studying the addition of a ne" product that "ould have an expected
selling price of :16; and expected variable cost of :1;;. Anticipated demand is 87;;; units.
A ne" salesperson must be hired because the company's current sales force is "or(ing at
capacity. %"o compensation plans are under consideration:
Plan 1: An annual salary of :,'7;;; plus 1;1 commission based on gross sales dollars
Plan ': An annual salary of :1-;7;;; and no commission
&e*uired:
A. .hat is meant by the term >operating leverage>/
B. Calculate the contribution margin and net income of the t"o plans at 87;;; units.
C. Compute the operating leverage factor of the t"o plans at 87;;; units. .hich of the t"o
plans is more highly leveraged/ .hy/
. Assume that a general economic do"nturn occurred during year no. '7 "ith product demand
falling from 87;;; to 67-;; units. By using the operating leverage factors7 determine and
sho" "hich plan "ould produce a larger percentage decrease in net income.
#$: 8 %ype: A7 3
Ans"er:
A. $perating leverage refers to the use of fixed costs in an organi+ation's overall cost
structure. An organi+ation that has a relatively high proportion of fixed costs and lo"
proportion of variable costs has a high degree of operating leverage.
B. Plan 1 Plan '
?ales revenue: 87;;; units x :16; :17'8;7;;; :17'8;7;;;
#ess variable costs:
Product cost: 87;;; units x :1;; : 8;;7;;; : 8;;7;;;
?ales commissions: :17'8;7;;; x 1;1 1'87;;; ;
%otal variable cost : 9'87;;; : 8;;7;;;
Contribution margin : ,2'7;;; : -8;7;;;
@ixed costs ,'7;;; 1-;7;;;
3et income : ,';7;;; : ,-;7;;;
C. Plan 1: :,2'7;;; C :,';7;;; K 1.1
Plan ': :-8;7;;; C :,-;7;;; K 1.-1
Plan ' has the higher degree of operating leverage because it has the higher operating
leverage factor.
. 4etropolitan "ould experience a larger percentage decrease in income if it adopts Plan '. %his
situation arises because Plan ' has a higher degree of operating leverage.
%he percentage decreases in profitability can be figured by multiplying the percentage decrease
in sales revenue by the operating leverage factor. ?ales dropped from 87;;; units to 67-;;
units7 or ';1. %hus:
Plan 1: ';1 x 1.1 K ''.;1
232 Hilton, Managerial Accounting, Seventh Edition
Plan ': ';1 x 1.-1 K '8.'1
Chapter 8 233
*I!CU!!IO" UE!TIO"!
Cost-Volume-Profit Analysis
8'. %he Bo?an Corporation ma(es maGor household appliances such as refrigerators7 stoves7 and
dish"ashers. ?ales are heavily dependent on the number of housing starts and the level of
disposable income. 3ext year7 the number of housing starts in the Central region is expected to
be the same as this year'sH ho"ever7 about t"o)thirds of these starts "ill be for rental apartments
as compared to an historical average of one)third. %he remaining housing starts "ill be for
single)family homes and upscale condominiums.
Bo?an generally ma(es t"o models of each product: !conomy <fully functional7 but "ith fe"
special features= and Prestige <"ith the most popular special features=. Bo?an assumes a product
mix of -;1 !conomy and 6;1 Prestige.
&e*uired:
A. !xplain ho" a cost)volume)profit <CVP= analysis may be used by management.
B. $ne of the assumptions that underlies CVP analysis is a constant sales mix over the relevant
range of activity. .hat are three other assumptions of CVP analysis/
C. escribe ho" the percentage change in rental units could create a problem "ith Bo?an's CVP
analysis.
#$: 17 27 6 %ype: &C7 3
Ans"er:
A. CVP analysis may be used to perform >"hat if> analyses that allo" management to study the
effects of various operating changes on firm profitability. @or example7 the effects of
changes in selling price7 variable costs7 fixed costs7 and volume may be explored by
manipulating the CVP model "ith different values for these items.
B. %hree additional assumptions for the CVP model are:
%he per)unit selling price is constant.
Cost behavior is linear over the relevant rangeSthat is7 variable cost per unit is constant
and fixed costs in total are constant.
%he number of units manufactured and sold is the same.
C. %he shift to"ard more apartments and fe"er single)family homes and upscale condominiums
may mean that demand for the !conomy models "ill increase relative to the demand for
Prestige models. %he rental apartment generally "ill be used for households "ith lo"er
income.
%he shift in buying habits could create a problem since the CVP model assumes a constant
sales mix. %he mix change could invalidate previous CVP studies.
234 Hilton, Managerial Accounting, Seventh Edition
Contri-ution Mar+in
8,. 4addox Corporation's product no. F6-0 has a negative contribution margin. Fo" can such a
situation arise/ ?hould the company continue to stoc( and sell product no. F6-0/ !xplain.
#$: 1 %ype: &C7 3
Ans"er:
A negative contribution arises because selling price is less than variable cost. ?everal reasons
may create this situation: <1= inefficient operations and7 thus7 higher costsH <'= a very competitive
mar(etplace7 "hich has forced the firm to lo"er its priceH and <,= a loss leader "hereby 4addox
is purposely ta(ing a loss on product no. F6-0 "ith the intent of stimulating customer demand for
other7 more profitable products.
!ach unit sold "ill lo"er overall profitability so7 technically7 4addox should not continue to sell
product no. F6-0. Fo"ever7 for reasons <'= and <,= above7 the firm might decide other"ise and
stic( "ith this >loser.>
Cost !tru&ture an, Operatin+ Le(era+e
8-. $perating leverage is an important concept for many companies.
&e*uired:
A. efine operating leverage.
B. Assume that a firm pays no income taxes and is planning to increase its selling price. 5f sales
volume in units does not change7 "hat "ill be the effect on the operating leverage factor/
!xplain.
C. Assume that another firm that pays no income taxes is planning to increase fixed
manufacturing costs and decrease variable manufacturing costs per unit. At the present
volume of production7 the total manufacturing costs "ill be unchanged. .hat "ill this
change do to the operating leverage factor/ !xplain.
#$: 8 %ype: &C7 3
Ans"er:
A. 4athematically7 operating leverage is contribution margin divided by net income. %he
degree of operating leverage indicates a company's ability to operate "ith a given amount of
fixed cost relative to variable cost.
B. %he increase in selling price "ith no change in units sold "ill increase both contribution
margin and net income by the same dollar amount. %he percentage change in net income "ill
be greater than the percentage change in contribution margin and7 thus7 the operating leverage
factor "ill decrease.
C. %he decrease in variable costs "ill increase the contribution margin7 but net income "ill not
change because total costs remain the same. %he operating leverage factor "ill therefore
increase.
Chapter 8 235
A,(an&e, Manufa&turin+ Effe&ts on Cost-Volume-Profit $elationships
82. 4any firms are moving to"ard flexible manufacturing systems and adopting the Gust)in)time
<P5%= philosophy.
&e*uired:
A. Fo" is cost behavior altered in the typical flexible manufacturing environment as compared
to a traditional manufacturing system/ .hat is the impact on the brea()even point/ !xplain.
B. $ne of the assumptions underlying cost)volume profit analysis is that sales volume and
production volume are e*ual. ?tated another "ay7 inventories are assumed to remain
constant. 5s this assumption li(ely to be violated under an ongoing P5% philosophy/ !xplain.
#$: 1; %ype: &C7 3
Ans"er:
A. Variable manufacturing costs typically decrease in a flexible manufacturing environment and
total fixed costs increase. Automation <along "ith accompanying depreciation7 lease7 and
maintenance costs= and fe"er people normally account for this change. %he brea()even
point7 as a result7 often increases.
B. .hen a company first changes to P5%7 there is li(ely to be a drop)off in inventories.
Fo"ever7 the assumption of no significant change in inventories "ill probably not be violated
for an ongoing P5% user. Any accompanying level changes are not li(ely to be significant
relative to the volume of production and sales.
23 Hilton, Managerial Accounting, Seventh Edition