tb_ch17

Chapter 17—Cost volume profit analysis

Question 1. The concept of cost volume profit analysis is based on classifying costs as: A*. Fixed and variable costs. B. Variable product and period costs. C. Product controllable and uncontrollable costs. D. Both A and B. E. Both A and C.

Question 2. The break even point is that level of activity where:A*. Total revenue equals total cost.B. Total revenue equals fixed cost.C. Total revenue equals variable cost.D. Total revenue equals product cost.E. C or D.

Question 3. The contribution margin is calculated as the difference between:A. Sales revenue and fixed cost per unit.B*. Sales revenue and variable cost per unit. C. Sales revenue and product cost per unit.D. Fixed cost per unit and variable cost per unit. E. Variable cost per unit and fixed cost per unit.

Question 4. The break even point is calculated by:A. Sales volume x unit selling price / Sales volume x unit variable expense.B. Fixed expenses / Total revenue.C. Variable expenses / Total revenue.D*. Fixed expenses / Unit contribution margin.E. Variable expenses / Unit contribution margin.

Question 5. Ribco Co. Ltd makes and sells only one product. The unit contribution margin is $6, and the break even point in unit sales is 24,000. What are the company’s fixed expenses? A. $4,000. B. $14,400. C. $40,000. D*. $144,000.E. $400,000.

Question 6. The contribution margin ratio is (all on a per unit basis):A. The difference between the selling price and the variable cost.B. Fixed cost divided by variable cost.C. Variable cost divided by selling price.D*. Contribution margin divided by selling price.E. Contribution margin divided by fixed cost.

Question 7. The break even point in sales dollars can be calculated by dividing: A. Fixed expenses by the unit contribution margin. B. Variable expenses by the unit contribution margin. C*. Fixed expenses by the contribution margin ratio.D. Variable expenses by the contribution margin ratio. E. Selling price by the contribution margin ratio.

Testbank t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne and Hilton250

Consider the following information when answering the questions below.Fixed expenses $60,000Variable cost per unit $15Selling price per unit $20

Question 8. The firm’s fixed costs are $60,000, variable cost per unit is $15 and selling price per unit is $20. The contribution margin is:A*. $5. B. $15. C. $20. D. $35. E. None of the above.

Question 9. The firm’s fixed costs are $60,000, variable cost per unit is $15 and selling price per unit is $20. The break even point in units is: A. 1,715. B. 3,000.C. 4,000.D*. 12,000.E. 160,000.

Question 10. The firm’s fixed costs are $60,000, variable cost per unit is $15 and selling price per unit is $20. The break even point in sales dollars is:A. $ 60,000.B $ 80,000.C $120,000.D*. $240,000.E. $300,000.

Question 11. The firm’s fixed costs are $60,000, variable cost per unit is $15 and selling price per unit is $20. The contribution margin percentage is: A. 2.5%.B*. 25%.C. 33%. D. 75%. E. 400%.

Question 12. Epex Pty Ltd makes a single product. Annual fixed expenses are $48,000 and the contribution margin ratio is 30%. What volume in sales dollars is necessary for Epex to achieve a target profit of $15,000?A. $63,000.B. $68,571.C. $90,000.D. $160,000.E*. $210,000.

Question 13. If the contribution margin is $10, the selling price per unit is $25 and the fixed costs are $45,000, what is the number of units that must be sold to break even? A*. 4,500.B. 4,000. C. 3,000. D. 1,800. E. 367.


Question 14. If the contribution margin is $10, the selling price per unit is $25 and the fixed costs are $45,000, to earn a targeted net profit of $50,000 the total dollar value of sales must be at least: A. $8,000.B. $10,000.C. $112,500.D. $122,500.E*. $237,500.

Question 15. The difference between the budgeted sales revenue and the break even sales revenue is the: A. Unit contribution margin. B. Contribution margin percentage. C*. Safety margin.D. Targeted net profit. E. Operating leverage.

Question 16. Suppose fixed expenses were to increase by 5.9%. How would this affect the break even point? A*. The break even point in units would rise 5.9%.B. The break even point in dollars would fall 5.9%. C. The break even point in dollars would rise 11.8%. D. The break even point in dollars would rise by more than 5.9%.E. The break even point in dollars would fall by more than 5.9%.

Question 17 Suppose variable expenses were to decrease by $3.00 per unit. What effect would this have on the cost volume profit (CVP) analysis? A. The unit contribution margin would rise by $3.00. B. The break even point in units would increase.C. The break even point in units would decrease. D*. A and C.E. A and B.

Question 18. Which of the following changes will affect the unit contribution margin? A. Changes in fixed cost.B. Changes in variable cost per unit.C. Changes in selling price per unit. D. A and C.E*. B and C.

Question 19. Suppose the selling price per unit increased from $5.00 to $6.00 per ticket. What affect would this have on the cost volume profit (CVP) analysis?A. The contribution margin would increase. B. The contribution margin would decrease. C. The break even point in units would decrease. D*. A and C.E. B and C.

Question 20. Assume that selling price is greater than variable cost. Now suppose the selling price and the variable cost per unit increase by $5.00. What effect would these changes have on the contribution margin in dollars and on the contribution margin ratio?

Dollar contribution margin Contribution margin ratioA. Increase IncreaseB. Increase Decrease


C. Decrease DecreaseD. No change No changeE*. No change Decrease

Question 21. The total contribution margin is calculated as the difference between: A. Sales price and variable cost per unit. B. Sales price and fixed cost per unit. C. Total revenue and total fixed cost. D. Total revenue and total cost. E*. Total revenue and total variable cost.

Question 22. Cost volume profit (CVP) analysis is based on certain general assumptions. Which of the following statements about these assumptions is/are true? A. The price of the product will remain constant as volume varies within the relevant range.B. Expenses can be categorised as fixed, variable or semi-variable.C. Efficiency and productivity remain constant.D. Total fixed costs remain constant and unit variable cost remains unchanged as activity varies.E*. All of the above statements are true.

Question 23. Which of the following statements about cost volume profit (CVP) analysis and activity-based costing is/are true?1. The term fixed cost is not used because for many costs the relationship with respect to volume is not relevant.2. Facility-level costs can be regarded as fixed. 3. Batch-level and product-level costs are non-volume activity costs.

A. 1, 2 and 3.B*. 1 and 2.C. 1 and 3.D. 2 and 3.E. 1.

Question 24. Under an activity-based costing system, the break even point in units is calculated by:A. Total non-volume activity cost / selling price per unit – fixed cost per unit.B*. Total non-volume activity cost / selling price per unit – cost per unit.C. Total fixed cost / selling price per unit – cost per unit.D. Total non-volume activity cost / contribution margin per unit.E. Total fixed costs / contribution margin per unit.

Question 25. Which of the following are advantages of an activity-based costing approach to cost volume profit (CVP) analysis as compared to a CVP analysis based on traditional product costing?

1. Unit variable costs are recognised more clearly.2. Fixed costs are viewed as fixed only with respect to changes in sales and production volume, but not as fixed with respect to changes in other cost drivers such as number of set-ups, number of material moves, etc. 3. The assumption in traditional CVP analysis that sales and production volumes are equal can be relaxed.

A. 1. B*. 2.C. 3.D. 1 and 2.E. 2 and 3.


Question 26. Which of the following assumptions is made when doing a cost volume profit (CVP) analysis based on activity-based costing?

1. Sales volume equals production volume.2. As production volume changes, the number of set-ups, inspections, material moves etc. does not change. 3. The purchase price of raw materials per unit remains constant.

A. 1. B. 2. C. 3. D*. 1 and 3.E. 1, 2 and 3.

Question 27. The extent to which an organisation uses fixed costs in its cost structure is called: A. Financial leverage.B*. Operating leverage.C. Fixed cost leverage.D. A and C.E. B and C.

Question 28. The smaller the proportion of fixed costs in a firm’s cost structure:A. The greater the impact on profit from a percentage change in sales volume.B. The lesser the impact on profit from a percentage change in sales volume.C. The lower the contribution margin.D. A and C.E*. B and C.

Question 29. If the operating leverage factor is known, which of the following can be determined?A. Contribution margin ratio.B. Contribution margin in dollars.C. Fixed expenses.D. Break even point in sales dollars.E*. Percentage change in profit for a given percentage change in sales.

Question 30. Consider the following data. Alclear Pool & Spa presently provides a weekly maintenance service to 150 homes. Variable costs amount to approximately $12 per week for labour, mileage, chemicals and other supplies. Fixed costs are approximately $13,000 per quarter (13 weeks). Customers pay $270 per quarter for the weekly service. All contracts are written for one quarter (13 weeks).

Determine the number of customers to break even.A. 95.B. 103. C*. 114. D. 124. E. 197.

Question 31. Consider the following data. Alclear Pool & Spa presently provides a weekly maintenance service to 150 homes. Variable costs amount to approximately $12 per week for labour, mileage, chemicals and other supplies. Fixed costs are approximately $13,000 per quarter (13 weeks). Customers pay $270 per quarter for the weekly service. All contracts are written for one quarter (13 weeks). Now assume the contracts with customers are changed from three-month to six-month contracts in order to cover the entire swimming pool season. Assume the price for the six-month contract is twice the price for the three-month contract. How would the contribution margin in dollars per contract and the contribution margin percentage per


contract be affected?Dollar contribution margin Contribution margin percentage

A. Double DoubleB. No change DoubleC*. Double No changeD. No change No changeE. Cannot be determined Cannot be determined

Question 32. Consider the following data. Alclear Pool & Spa presently provides a weekly maintenance service to 150 homes. Variable costs amount to approximately $12 per week for labour, mileage, chemicals and other supplies. Fixed costs are approximately $13,000 per quarter (13 weeks). Customers pay $270 per quarter for the weekly service. All contracts are written for one quarter (13 weeks). Now assume the contracts with customers are restructured such that the price per quarter is $300 and the contribution margin percentage is 57%. Assume the tax rate is 25%.

Determine the sales dollars (to the nearest $100) necessary to obtain an after-tax profit of $9,600 per quarter.A. $39,600. B*. $45,300.C. $52,900.D. $60,000.E. $90,200.

Question 33. Consider the following data. Maxie Pty Ltd makes and sells two types of shoes, Plain and Fancy. Product data is as follows:

Plain FancyUnit selling price $20.00 $35.00Variable costs per unit $12.00 $24.50

Sixty per cent of the sales in units are Plain and annual fixed expenses are $45,000.

Determine the weighted average unit contribution margin.A. $18.50.B. $17.00.C. $9.25.D*. $9.00.E. $4.80.

Question 34. Consider the following data. Maxie Pty Ltd makes and sells two types of shoes: Plain and Fancy. Product data is as follows:


Sixty per cent of the sales in units are Plain and annual fixed expenses are $45,000 and the sales mix remains constant.

Determine the total number of units Maxie Pty Ltd must sell to break even. A. 9,375. B*. 5,000. C. 4,737.D. 2,647.E. 2,432.


Plain FancyUnit selling price $20.00 $35.00


Variable costs per unit $12.00 $24.50Sixty per cent of the sales in units are Plain and annual fixed expenses are $45,000 and the sales mix remains constant.

Determine the number of units of Plain Maxie Pty Ltd must sell to break even. A. 9,375. B. 5,625. C. 5,000. D. 3,375. E*. 3,000.



Sixty per cent of the sales in units are Plain and annual fixed expenses are $45,000 and the sales mix remains constant.

How many units of Fancy must Maxie sell to earn a target profit of $31,500? A. 1,654. B. 2,000. C*. 3,400. D. 7,286. E. 8,500.



Sixty per cent of the sales in units are Plain and annual fixed expenses are $45,000 and the sales mix remains constant. Assume an income tax rate of 20%.

How many units of Plain must the company sell to earn an after tax profit of $18,000?A*. 4,500.B. 7,875.C. 3,960.D. 3,240.E. 8,437.

Question 38. Econ Pty Ltd produced and sold 45,000 units of a single product last year. Data concerning the year’s profit and loss statement are as follows:

Sales revenue $1,350,000Manufacturing costs Variable $585,000 Fixed $270,000Selling costs Variable $40,500 Fixed $544,000Administrative costs Variable $184,500 Fixed $108,000

Econ sells 45,000 units per year, sales revenue is $1,350,000, variable costs are $810,000 and fixed costs are $922,000.

What was Econ’s total contribution margin for the year?


A. $495,000.B*. $540,000.C. $724,500.D. $765,000.E. $810,000.

Question 39. Econ Pty Ltd produced and sold 45,000 units of a single product last year. Data concerning the year’s profit and loss statement is as follows:



What was Econ’s break even point in unit sales?A. 15,882.B. 24,000.C. 25,411.D. 26,832.E*. 36,000.




What was Econ’s break even point in dollar sales?A. $720,000.B. $762,330.C*. $1,080,000.D. $1,134,000.E. $1,242,000.


Sales revenue $1,350,000Manufacturing costs Variable $585,000 Fixed $270,000Selling costs


Variable $40,500 Fixed $544,000Administrative costs Variable $184,500 Fixed $108,000


What was Econ’s operating average? A. 4. B*. 5.C. 6.D. 7.E. 8.




Assuming sales revenue increases by 15%, what will be the percentage increase in profit before income tax? A. 15%.B. 45%.C. 60%.D*. 75%.E. 100%.



Econ sells 45,000 units per year, sales revenue is $1,350,000, variable costs are $810,000 and fixed costs are $922,000. Assuming all cost relationships will remain constant for the coming year, how many units must be sold for the company to earn an after-tax profit of $180,000 if the income tax rate is 40%? A. 45,000. B. 47,500.C*. 61,000.D. 70,000.


E. 73,500.Question 44. Activity-based costing includes product costs that relate to:

1. The number of units produced2. The number of batches produced3. The number of product lines produced4. Are not related to products

A. 1.B. 2.C*. 3.D. 4.E. None of the above.

Question 45. Under activity-based costing systems, break even point in units treats which costs as included in the numerator?

1 Batch costs2. Product costs3. Faculty level costs

A. 1 and 2.B. 1 and 3.C. 2 and 3.D*. 1, 2 and 3.E. None of the above.

Question 46. The firm uses activity-based costing and has the following cost structure: selling price $50, batch cost $20,000, unit level costs $30 per unit, facility costs $120,000 and product costs $60,000. What is the break even point in units?A. 6,000.B. 7,000.C. 9,000.D*: 10,000.E. Cannot be determined from the above data.

Question 47. Cost volume profit (CVP) analysis, including customer-related costs, must incorporate which of the following costs:

1. Market level costs2. Customer level costs3. Order level costs4. Batch level costs

A. 1 and 2.B. 2 and 3.C. 1, 2 and 3.D*. All the above.E. 2, 3 and 4.

Question 48. Which of the following statements apply to cost volume profit (CVP) and sensitivity analysis?

1. Only one variable is changed.2. All variables are changed.3. One or more variables are changed.4. Only one set of variables need be assessed.

A. 1.B. 2.C*. 3.D. 4.E. None of the above.


Question 49. Goal seek analysis provides for which of the following?1. An output for a given set of inputs2. Required inputs for a given output3. A range of outputs for a range of inputs

A. 1.B*. 2.C. 3.D. All of the above.E. None of the above.

Question 50. Limitations of cost volume profit (CVP) include which of the following?1. Not all costs can be classified as fixed or variable.2 Revenue changes may not be linear.3. Sales volume is the only cost driver.4. Inventory levels do not change.

A. 1 and 2.B. 1 and 3.C. 1, 2 and 3.D. 1, 3 and 4.E*. All the above.

Question 51. Which of the following are assumptions of cost volume profit (CVP) analysis?1. Sales mix is constant.2 External factors do not change.3. Fixed costs change with sales volume.4. Variable costs are constant per unit of sales.

A. 1, 2 and 3.B. 2, 3 and 4.C*. 1, 2 and 4.D. 1, 2, 3 and 4.E. None of the above.

Question 52. Your local pizza parlour has annual fixed costs of $20,000, the pizza price is $8 and the unit variable cost $4. What is the contribution margin ratio?A. 40%.B. 45%.C*. 50%.D. 55%.E. 60%.

Question 53. If break even sales volume is 10,000, sales price $10, variable costs $10,000 and profit $15,000, what are the fixed costs?A. $35,000.B. $40,000.C*. $25,000.D. $20,000.E. $15,000.

Question 54. If break even sales volume is $40,000 and contribution margin $7,500, what is the net profit?A. $7,500.B. $32,500.C*. $0.D. $15,000.


E. Cannot be determined from the above data.Question 55. In a labour intensive industry, the relationship between (1) operating leverage (2) break even point and (3) safety margin is:A. Low, high, low.B. High, high, low.C*. Low, low, high.D. Low, low, low.E. High, high, high.

Question 56. In an automated firm, the relationship between (1) level of fixed costs (2) level of risk and (3) break even point is:A. High low, high.B. Low, high low.C. High, high, low.D. Low, low, high.E*. High, high, high.

Question 57. In a labour intensive firm the relationship between (1) operating leverage (2) safety margin and (3) profit potential is:A*. Low, high, low.B. Low, low, high.C. High, low, high.D. Low, high, high.E. High, low, low.

Question 58. In an automated firm the relationship between (1) safety margin (2) operating leverage and (3) profit potential is:A*. Low, high, high.B. High, high, low.C. Low, high, low.D. High, high, high.E. High, low, low.

Question 59. Nesto sells two products: X and Y. The contribution margin for X is 40% and for Y 50%. If the proportion of sales of X decreases, what will happen to the weighted average contribution margin?A*. Increase.B. Decrease.C. Remain the same.D. Cannot be ascertained from the above data.E. Changes in sales volume do not affect weighted average contribution margin.

Question 60. Nesto sells two products Z and W. Z sells for $20 and has variable costs of $12. W sells for $50 and has variable costs of $25. If sales volumes are Z 5,000 and W 1,000, what is the average contribution margin?A. 40%.B. 50%.C. 45%.D*. 43.3%.E. 46.7%.

Question 61. Pizza delivery business; basic cost volume profit (CVP) analysis. Five-Star Pizza delivers pizzas to the residential halls and units near a major university. The company’s annual fixed expenses are $20,000. The sales price of a pizza is $8, and it costs the company $4 to


make and deliver each pizza. (In the following requirements, ignore income taxes.)REQUIRED:1. Using the contribution margin approach, calculate the company’s break even point in units (pizzas).2. What is the contribution margin ratio?3. Calculate the break even sales revenue. Use the contribution margin ratio in your calculation.4. How many pizzas must the company sell to earn a target net profit of $50,000? Use the equation method.1. Break even point (in units) = Fixed expenses / unit contribution margin

= $20,000 / ($8 – $4)= 5,000

2. Contribution margin ratio = unit contribution margin / unit sales price= ($8 – $4) / $8= 0.5 or 50%

3. Break even point (in sales dollars) = fixed expenses / contribution margin rati0= $20,000 / 0.5= $40,000

4. Let X denote the sales volume of pizzas required to earn a target net profit of $50,000($8–$4)X – $20,000 = $50,000

$4X = $70,000X = 17,500 pizzas

Question 62. Cost volume profit (CVP) analysis Ajax Company Pty Ltd has kept data on sales and total cost for the past five years. Projections for year 6 are included as well.Year Revenues $ Fixed cost $ Variable cost $123456

56,00050,00064,00060,00058,00066,000

30,00030,00030,00030,00030,00030,000

17,00014,50020,00019,50020,30024,000

REQUIRED:1. Calculate the contribution margin in dollars, contribution margin ratio, operating profit, and operating profit as a percentage of sales.2. Analyse the cost volume relationships to evaluate Ajax Company Pty Ltd’s control of cost over the six years.

1. Year Contribution margin $ % of revenues Operating profit $ % of revenues12345

39,00035,50044,00040,50037,700

69.6%71.0%68.8%67.5%65.0%

9,0005,50014,0010,507,700

16.1%11.1%21.9%17.5%13.3%

Projections6 42,000 63.6% 12,000 18.2%

2. Variable costs as a percentage of sales have been increasing steadily over the six years with exception of year 2. As a result, the operating profit percentage generally has decreased. In year 6, the variable costs are projected to rise sharply again and a significant sales increase is required to help profits rebound.

The decline in the contribution margin ratio leads to volatility in operating profit despite the stability of fixed costs.

Question 63. Break even analysis for decision making.Bruggs & Strutton Company Ltd manufactures an engine for carpet cleaners called the ‘Snooper’. The ‘Snooper’ is the only product that the company produces and sells. Cost and revenue data, based on


sales of 40,000 units, is given below.Total $ Per unit $

Sales 1,600,000 40.00Cost of goods sold 1,120,000 28.00Gross margin 480,000Selling and administration expense 120,000 3.00Net profit before taxes 360,000

The cost of goods sold consists of $800,000 variable and $320,000 fixed. Selling and administrative expenses consist of $100,000 variable and $20,000 fixed.

REQUIRED:1. Calculate the break even point in units.2. Calculate the margin of safety at the present sales level in dollars and per cent.3. Bruggs & Strutton received an order for 6,000 units at a price of $25.00. There will be no increase in fixed costs and variable costs will be reduced by $0.54 per unit in packaging costs. The company has excess capacity to produce the order. Determine the projected increase or decrease in profit from the order.4. Bruggs also received an order for 2500 units at $29.00 per unit. Bruggs won’t save any money in packaging costs for the new order. If only one order (3 or 4) can be accepted, which one is the more attractive?1. Contribution margin = $40.00 – ($20.00* + $2.50**)

= $40.00 – $22.50= $17.50

Break even units = Fixed cost / Contribution margin= $340,000*** / $17.50= 19,428.57 or 19,429 units

* $800,000 /40,000units = $20.00 per unit** $100,000 / 40,000 units = $2.50 per unit*** $320,000 + $20,000 =$340,000

2. Margin of safetyBreak even = Fixed cost / Contribution ratio

= $340,000 / 0.4375=777,142.86 or 777,143

Margin of safety = $1,600,000 – 777,143= $822,857

Projected increase in profit: (6,000)(3.04) = $18,240

3. Order priceVariable cost goods sold Variable admin and sellingContribution marginAdd: savingsNet contribution margin

$25.00$20.00$2.50 $2.50$0.54 $3.04 per unit

4. Order price Variable cost goods sold Variable admin and sellingContribution margin

$29.00$20.00$2.50$6.50 per unit

Projected increase in profit: (2500)(6.50) = $16,250

The first order has a greater projected contribution to profit.

Question 64. Retail. Cost volume profit (CVP) analysis with multiple products.Speed Bicycle Shop sells 10-speed bicycles. For purposes of a CVP analysis the shop owner has divided sales into two categories as follows:Product type Sales price $ Invoice cost $ Sales commission $High quality 100 55 5


Medium quality 60 27 3

Three-quarters of the shop’s sales are medium quality bikes. The shop’s annual fixed expenses are $13,000. (In the following requirements, ignore income taxes.)

REQUIRED:1. Calculate the unit contribution margin for each product type.2. Calculate the weighted average unit contribution margin, assuming a constant sales mix.3. What is the shop’s break even sales volume in dollars? Assume a constant sales mix.4. How many bicycles of each type must be sold to earn a target net profit of $6,500? Assume a constant sales mix.1. Bicycle type Sales price Unit variable cost Unit contribution

High quality $100 $60 ($55 + $5) $40Medium quality $60 $30 ($27 + $3) $30

2. Weighted-average unit = ($40 x 25%) + ($30 x 75%)Contribution margin = $32.50

3. Break even point (in units) = fixed costs / weighted average unit contribution margin= $13,000 /$32.50= 400

Bicycle type Break even sales volume

Sales price Total revenue

High quality 100 (400 x .25) $100 $10,000Medium quality 300 (400 x .75) $60 $18,000Total $28,000

4. Target net profitSales volume required to earn target net profit of $6,500

= ($13,000 + $6,500) / $32.50= 600 bicycles

This means that the shop will need to sell the following volume of each type of bicycle to earn the target net income:High qualityMedium quality

150(600 x 0.25)450 (600 x 0.75)

Question 65. Cost volume profit (CVP) analysis with multiple products. Alfray Pty Ltd manufactures and sells three products: Algo, Bego and Cego. Annual fixed costs are $1,210,000.

Algo Bego Cego Sales mix in units 50% 30% 20%Selling price $200 $600 $800Variable costs $100 $280 $320Contribution margin $100 $320 $480

REQUIRED: In 1 to 3, use the sales mix as stated above.1. Determine the weighted average unit contribution margin and percentage.2. Determine the break even volume in units and in sales dollars in total and for each product.3. Determine the number of each product that must be sold to obtain a profit of $481,000.4. Assume the sales mix is changed to 40%, 30% and 30%. Will the number of units required to break even be increased or decreased? Explain.

1. Weighted average unit contribution margin: 50%, 3%, 20% mix.Algo Bego Cego Total

Contribution margin per unit $100 $320 $480Product mix 50% 30% 20%


Weighted contribution margin $50 $96 $96 $242Selling price $200 $600 $800Product mix 50% 30% 20%Weighted selling price $100 $180 $160 $440

Weighted contribution margin percentage: 242 / 440 = 55%.

2. Break even volume in units and sales dollars= fixed costs / weighted average unit contribution margin= $1,210,000 / $242 per unit = 5,000 units

Algo Bego Cego TotalProduct mix 50% 30% 20%Units 500 1500 1000 5,000Selling price $200 $600 $800Sales ($000) $500 $900 $800 $2,200

Break even volume in sales dollars using contribution margin percentage = fixed costs / weighted average contribution margin percentage= $1,210,000 / 0.55 = $2,200,000Number of units $2,200,000 / $440 = 5,000 units

3. Sales to obtain profit of $484,000= fixed costs plus profit / weighted average unit contribution= ($1,210,000 + 484,000) / $242 = 7,000 units

Algo Bego Cego TotalProduct mix 50% 30% 20%Units 3,500 2,100 1,400 7,000Selling price $200 $600 $800Sales ($000) $700 $1,260 $1,120 $3,080

Fixed costs plus profit / weighted average contribution margin percentage= ($1,210,000 + 484,000) / .55 = $3,080,000Number of units $3,080,000 /$440 = 7,000 units

4. The number of units required would decrease, since a greater proportion of units with a higher contribution margin percentage would be sold.

Question 66. Motel and restaurant; cost structure and operating leverage.A contribution profit and loss statement for the Clarion Hotel is shown below. (Ignore income taxes.)

Revenue Variable expenses Contribution marginFixed expenses Net profit

$250,000$150,000$100,000 $75,000$25,000

REQUIRED:1. Show the hotel’s cost structure by indicating the percentage of the hotel’s revenue represented by each item on the profit and loss statement.2. Suppose the hotel’s revenue declines by 15% due to a decline in operating volume. Use the contribution margin percentage to calculate the resulting decrease in net profit.3. What is the hotel’s operating leverage factor when revenue is $250,000?4. Use the operating leverage factor to calculate the increase in net profit resulting from a 5% increase in sales revenue.


1. Amount $ %RevenueVariableContribution marginFixed expensesNet profit

250,000150,000100,00075,00025,000

10060403010

2. Decrease in revenue Contribution margin percentage Decrease in net profit$250,000 x 15% 40% $15,000

3. Operating leverage factor (at revenue of $250,000)= contribution margin / net profit= $100,000 / $25,000= 4

4. Percentage change = Percentage increase in revenue x Operating leverage factor= 5% x 4= 20%

Increase in profit = $25,000 x 20%= $5,000

Question 67. Cost volume profit (CVP) analysis. Wiggit Manufacturing Company Ltd expects to sell 150,000 Wiggits this year. Expected cost and revenue data is given below.

Variable cost $300,000Fixed cost $200,000Revenue $600,000

REQUIRED:1. Calculate the break even point in units and in dollars.2. Calculate the contribution margin percentage.3. Calculate the margin of safety.4. If the selling price increases 10% and fixed cost falls 5% recalculate the break even point in units and in dollars.5. Referring to the original data, if the desired after tax profit is $56,000 what level of sales are needed? Assume a 30% tax rate with the original data.

1. Per unit information based on 150,000 unitsVariable costsSales price

$2.00$4.00

Break even in unitsFixed costs / contribution margin= $200,000 / ($4.00 – $2.00)= 100,000

Break even in dollarsFixed costs / contribution margin ratio= $200,000 / 0.5= $400,000

2. Contribution margin percentage= Sales price – variable cost / sales price = ($4.00 – $2.00) / $4.00= 50% or 0.5

3. Margin of safety= sales revenue – break even sales= $600,000 – $400,000 = $200,000= 33 – 1/3%


4. New selling priceNew fixed cost

$4.00 x 1.10 $200,000 x 0.95

=$4.40= $190,000

Break even in units= $190,000 / $4.40 – $2.00= 79,167 units

Break even in dollars= $190,000 / 0.54545= $348,33

*Contribution margin ratio = ($4.40 – 2.00 ) / $4.40= .54545 or 54.545%

5. Profit before taxes= profit after taxes / (1 – tax rate)= $56,000 / (1 – 0.3)= $80,000

Needed sales= Fixed cost and profit before taxes / contribution margin ratio= $200,000 + 80,000 / 0.50= $560,000

Question 68. Cost volume profit (CVP) analysis and income taxes.The Mingoia Manufacturing Company Ltd produced 40,000 lamp poles last year. The following cost data were obtained from company records.

$ Per unit $Direct materials Direct labourVariable overheads Fixed overheads Variable selling admin Fixed selling and admin

120,000200,00080,000

120,00040,00080,000

3.00 5.00 2.00 3.00 1.00 2.00

Sales were $2,500,000 with an average selling price per unit of $62.50.

The company’s income tax rate last year was 50% and is expected to remain the same next year. Sales in units are expected to remain the same with an increase of 8% in the average selling price. All per unit variable costs are expected to increase by 5%; fixed costs are expected to increase 3%.

REQUIRED:1. How many poles must Mingoia sell in 19 x 2 to have a net profit after taxes of $1,000,000?2. Will the Mingoia Company achieve the desired operating profit after taxes of $1,000,000 if sales remain at the same level as 19 x l? Explain why or why not.1. Costs and revenue for next year

Sales in units 40,000Selling price $62.50 x 1.08 = $67.50

Variable cost per unitDirect materialsDirect labourVariable overheadVariable selling and adminTotal 5% Increase xVariable cost per unit

$3.00$5.00$2.00 $1.00 $11.00$l.05 $11.55

Total fixed costFixed overheadsSelling and administrationTotal3% increase x 19 x 2 fixed cost

$120,000$80,000 $200,000$l.03 $206,000

Desired operating profit before tax of $2,000,000


Profit after tax x (1 – 0.050)

$1,000,000= $2,000,000

Sales volume to achieve profit before tax of $2,000,000= ($206,000 + 2,000,000)/55.95*= 39,428 units

*($67.50–11.55)

2. Yes, they need to sell 39,428 units and expect to sell 40,000 units.

Question 69. Publishing; contribution profit statement. Worldwide Publications Pty Ltd produces and sells scientific reference books. The results of the company’s operations during the prior year are given below.

Sales revenue $400,000Manufacturing costs Fixed $100,000 Variable $20,000Selling costs Fixed $10,000 Variable $20,000Administrative costs Fixed $24,000 Variable $6,000

REQUIRED (ignore income taxes):1. Prepare a traditional profit and loss statement and a contribution margin profit statement for the company.2. What is the firms’ operating leverage factor for the sales volume generated during the prior year?3. Suppose sales revenue increases by 20 %. What will be the percentage increase in net profit?4. Which profit and loss statement would an operating manager use to answer question (3) above? Why?

1. Traditional profit and loss statement.Worldwide Publication Pty Ltd

Profit and Loss StatementFor the Year Ended 31 December 20xx

Sales $400,000Less: Cost of goods sold $300,000Gross margin $100,000Less: Selling expenses $30,000

Administrative expenses $30,000Net profit $40,000

Contribution margin profit statement.Worldwide Publication Pty Ltd

Profit and Loss StatementFor the Year Ended 31 December 20xx

Sales $400,000Less: Variable expenses:

Variable manufacturing $200,000Variable selling $20,000Variable administrative $6,000 $226,000

Contribution margin $174,000Less: Fixed expenses:

Fixed manufacturing $100,000Fixed selling $10,000Fixed administrative $24,000 $134,000

Net profit $40,000

2. Operating leverage factor (at $400,000 sales level)= contribution margin / net profit


= $174,000 / $40,000= 4.35

3. Percentage increase in net profit= percentage increase in sales revenue x operating leverage factor= 20% x 4.35= 87% in net profit

4. Most operating managers prefer the contribution profit statement for answering these types of questions. The contribution format highlights the contribution margin and separates fixed and variable expenses.

Question 70. This question has three independent parts.1. Explain how cost volume profit (CVP) analysis can be used by management.2. One of the assumptions underlying CVP analysis is a constant sales mix over the relevant range of activity. What are the other assumptions underlying CVP analysis?3. The Bygon Co. Ltd makes major household appliances such as refrigerators, stoves, and dishwashers. Sales are heavily dependent upon the number of housing starts and the level of disposable income. Next year the number of housing starts in Victoria is expected to be the same as this year; however, about two-thirds of these starts will be for rental units compared to a historical average of one-third. The remaining housing starts will be for single-family homes and up market units. Bygon generally makes two levels of each product: the economy model (fully functional, but with few special features) and the prestige model (with the most popular special features). Bygon assumes a product mix of 40% economy and 60% prestige. Describe how the change in the percentage of rental units in housing starts could create a problem with the stable product mix assumption.

1. CVP analysis can be used to perform ‘what if’ analyses that allow management to estimate the effects of various changes in operations on the profitability at various levels of sales. For example, the effects of changes in selling price, variable costs per unit, fixed costs in total and volume of goods produced and sold may be explored by manipulating the CVP model with different values for these items.

2. The four additional assumptions for the CVP model are: — Selling price per unit is constant.— Cost behaviour is linear; that is, variable cost per unit is constant and fixed costs in total are constant.— The number of units manufactured and sold is the same.— The behaviour of total costs is linear.

This implies that: (a) costs can be categorised as fixed, variable or semi-variable. (b) labour productivity, production technology and market conditions do not change. (c) there are no capacity additions during the period under consideration.

— For both variable and fixed costs, sales volume is the only cost driver. — Inventories at the beginning = inventories at the end. This implies that production = sales.

3. The shift toward more rental units and fewer single family homes and up-market units is very likely to mean that the demand for the economy models will increase relative to the demand for the prestige models. The rental unit generally will be used for households with a lower income. Traditionally, renters will save costs by purchasing the cheaper model.

Question 71. This question has three independent parts.1. Explain how the traditional profit and loss statement differs from the format used in cost volume profit (CVP) analysis.2. One of the assumptions underlying CVP analysis is a constant variable cost per unit and fixed costs in total over the relevant range of activity. What are the other assumptions underlying CVP analysis?3. The Beetle Co. Ltd is experiencing considerable growth and now is able to consider buying raw materials in far larger quantities than a few years ago. For example, one of their primary raw materials


may be obtained in bulk purchase lots consisting of three railway wagons as a purchasing unit. The advantage of purchasing in this quantity is that the per litre cost of this raw material is much cheaper than obtained through purchases of single semi-trailer truck loads. In planning for next year, the lower end of possible levels of activity is sufficiently small that the purchase of single semi-trailer truck loads would be appropriate. However, at the higher end of the possible levels of activity, purchase in three railway wagons units would be preferable. How could the situation described above be reflected in the CVP analysis? Which of the lines (total revenue, total costs, total fixed costs) would have to be changed and how?

1. In the traditional profit and loss statement, costs are grouped by function: manufacturing, selling, and administration. In CVP analysis, costs are grouped by behaviour: variable and fixed.

2. The additional assumptions are: — Constant selling price over the relevant range.— Stable product mix.— Equal sales and production volumes.— Labour productivity, production technology and market conditions do not change.— There are no capacity additions during the period under consideration.— There are no significant changes in the level of inventories.

3. The total cost line will be affected. The total cost line is constructed by adding variable costs on top of the fixed costs. For relatively low volume of activity, the slope of the total cost line should reflect the purchase costs associated with single semi-trailer truck purchases. However, at high levels of activity, the slope should reflect the purchase costs associated with the larger, three railway-wagon option. This means that the assumption of a constant variable cost per unit is not maintained.

Question 72. 1. ‘Cost driver’ is a widely used term in activity-based costing. What is a cost driver? What is the cost driver in conventional cost volume profit (CVP) analysis? How is the cost driver measured in conventional CVP analysis?2. In activity-based costing, costs are classified into unit level, batch level, product level, and facility level. How are these categories typically handled in CVP analysis, where there are only two categories available: fixed or variable?3. In an environment where activity-based costing is necessary and appropriate, is the relevance of conventional CVP analysis enhanced or diminished? Explain.4. Explain the additional limiting assumption of using CVP analysis under activity-based costing.

1. A cost driver is an activity or event that causes costs to be incurred. The cost drivers used in conventional CVP analysis are related to production volume. This may be measured directly in terms of units produced if products are reasonably homogeneous. Alternatively, it may be measured by using a ‘common denominator’ such as direct labour hours or machine hours to deal with diversity in the products manufactured.

2. The first category, unit level costs, is viewed as variable with respect to production volume in conventional CVP analysis; the others are not related to production volume, but will vary with respect to particular activity drivers. The term ‘fixed cost’ is not really relevant under ABC systems.

3. The relevance of conventional CVP analysis is diminished since costs can be viewed as fixed or variable only with respect to the impact of one cost driver: units produced and sold. When costs can vary with respect to the number of batches produced or the number of product lines that must be sustained, then the conventional CVP analysis cannot handle these changes in a very useful manner. The changes can be reflected in revised levels of activity costs to reflect expected changes in the number of set-ups or engineering changes, etc.

4. Under conventional CVP analysis, it is assumed that costs and profits are directly related to sales volume. However, activity-based costing recognises a range of cost drivers, including non-volume-based drivers. Consequently, there are few costs that are fixed in relation to their cost driver—most costs will vary in respect to particular activity drivers. The only costs that can be regarded as ‘fixed’ in the short run are facility-level costs as they do not vary with any activity driver.


To break even under an activity-based system, therefore, the business must generate sufficient sales not just to cover ‘fixed costs’, but to cover the ‘total’ costs of the business. Therefore, to find break even, we must add together all facility-, product- and batch-level costs and divide by the unit contribution margin.

Question 73. This question has three parts.1. Define operating leverage.2. The firm is planning to increase the selling price. If sales volume in units does not change, what will happen to the operating leverage factor? (Assume the firm pays no income taxes.) Explain.3. The firm is planning to increase fixed manufacturing costs and decrease variable manufacturing costs per unit. At the present volume of production, the total manufacturing costs will be unchanged. What will this change do to the operating leverage factor? (Assume no income taxes.) Explain.

1. Operating leverage is contribution margin divided by net profit. It indicates the extent to which a firm uses fixed costs in its cost structure.

2. The increase in selling price with no change in units sold will increase both the contribution margin and the net profit by the same dollar amount. The percentage change in net profit will be greater than the percentage change in contribution margin. Consequently the operating leverage factor will decrease.

3. The decrease in variable costs will increase the contribution margin, but net profit will not be changed due to the increase in fixed costs. Therefore the operating leverage factor will increase.


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