Spring 2018 Chapter 6 Review Questions
Page 1 of 8
Multiple Choice
1.
CVP Analysis is an important decision making tool for which reason?
a) Determining product mix
b) Setting selling price
c) Maximizing use of facilities
d) All of the above
2.
A Company has a contribution margin of 40% and fixed costs of $120,000.
What is the break-even point in dollars?
a) $48,000
b) $300,000
c) $200,000
d) $72,000
3.
P Company has fixed costs of $200,000, sales price of $50, and variable cost of
$30 per unit. How many units must be sold to earn profit of $50,000?
a) 2,500
b) 10,000
c) 12,500
d) 25,000
4.
B Company has fixed costs of $20,000 and a contribution margin ratio of 40%.
Currently, sales are $75,000. What is Bowl's margin of safety?
a) $20,000
b) $25,000
c) $30,000
d) $50,000
5.
Z Company makes two different products, Product A and Product B. They
currently sell 2,000 units of product A and 3,000 units of product B. What is
the sales mix percentages?
a) Product A= 40%, Product B= 60%
b) Product A= 60%, Product B= 40%
c) Product A= 67%, Product B= 33%
d) Product A= 33%, Product B= 67%
Spring 2018 Chapter 6 Review Questions
Page 2 of 8
6.
Degree of operating leverage is calculated as
a) Net income divided by contribution margin
b) Break-even sales divided by net income.
c) Net income divided by break-even sales.
d) Contribution margin divided by net income
7.
N Company sells two products. Product A sells for $100 per unit, and has unit
variable costs of $60. Product B sells for $70 per unit, and has unit variable
costs of $50. Currently, N Company sells three units of product A for every one
unit of product B sold. N Company has fixed costs of $750,000. How many
units would N Company have to sell to earn a profit of $300,000?
a) 7,500 units of A and 22,500 units of B
b) 22,500 units of A and 7,500 units of B
c) 17,600 units of A and 12,400 units of B
d) 12,400 units of A and 17,600 units of B
8.
Pear Company sells three products. Pear is having difficulty making all of the
required products because it only has limited hours available on the machine
that is used to produce all products. Determine the order in which the
products should be made to produce the most profit based on the below
information.
Tablets
Phones
Computers
Sales per unit
$1000
$800
$2,500
Variable cost per unit
$600
$250
$1,000
Machine Hours per unit
1
.5
1.5
a) Tablets, Phones, Computers
b) Computer, Phones, Tablet
c) Phones, Computer, Tablet
d) Computer, Tablet, Phone
9.
Goat Company provide the following CVP income statement. What is the
degree of operating leverage?
Sales
Variable Costs
Contribution Margin
Fixed Costs
Net Income
Spring 2018 Chapter 6 Review Questions
Page 3 of 8
a) 2.33
b) 1.61
c) 1.08
d) 0.57
10.
A high degree of operating leverage means which of the following?
a) A company has higher fixed costs relative to variable costs
b) A company has higher variable costs relative to fixed costs
c) A company has higher net income in comparison to sales
d) A company has higher sales in comparison to net income
Practice Problems
Practice Problem #1
W Company sells only one product with a selling price of $200 and a variable cost of $80
per unit. The company’s monthly fixed expense is $60,000.
Required:
A) Determine the breakeven point in units sold and sales
dollars.
B) Determine the breakeven point in units sold and sales
dollars if the company wants a net income of $30,000.
C) Determine margin of safety if current sales are $175,000.
Practice Problem #2
The H Company had wine sales for December as follows:
Red
White
Bottles sold
100
40
Average selling price
$80
$45
Average variable cost
$40
$15
The only other cost is the wine director’s salary of $36,000 per year.
Required:
a)
Prepare an income statement by type of wine and in total for
December.
Spring 2018 Chapter 6 Review Questions
Page 4 of 8
b)
Calculate breakeven in sales dollars by type of wine using the
weighted average contribution margin ratio. Calculate breakeven
in sales dollars by type of wine using the weighted average unit
contribution margin.
Practice Problem #3
F Company is debating whether to purchase new equipment that would increase fixed
costs from $96,000 to $196,000, and decrease variable costs from $14 per unit to $8
per unit. If it were to implement the change at its current production level of 100,000,
profit would not change. Selling price is $20 per unit.
Required:
a)
Prepare an income statement showing the changes to fixed and
variable costs
b)
Calculate the degree of operating leverage for each situation and
explain the change.
Practice Problem #4
K Company produces three picnic products: koolers, baskets and grills. Each product
requires a limited resource of materials. In which order should the products be produced
to maximize profits? A product line income statement for the year is shown below:
Koolers
Baskets
Grills
Total
Units Sold
2,000
2,500
1,500
Sales
$360,000
$600,000
$240,000
$1,200,000
Variable expenses
198,000
420,000
120,000
738,000
CM
162,000
180,000
120,000
462,000
Fixed expenses
240,000
Operating income
$262,000
Materials
8lbs
6lbs
4lbs
Spring 2018 Chapter 6 Review Questions
Page 5 of 8
Solutions
1.
D
2.
B
3.
C
4.
B
5.
A
6.
D
7.
B
8.
C
9.
A
10.
A
Solution #1
A)
CM ratio
=
Sales – variable expenses
=
$200–80=120
Sales
$200
=
60%
Breakeven sales
=
Fixed expenses + operating income
=
$60,000 + $0
Contribution margin ratio
60%
=
$100,000
Breakeven units
=
Fixed expenses + operating income
=
$60,000 + $0
Contribution margin $ per unit
$120
=
500 units
Spring 2018 Chapter 6 Review Questions
Page 6 of 8
B)
CM ratio
Sales – variable expenses
$200–80=120
60%
Sales
$200
Sales
Fixed expenses + operating
income
$60,000 +
$30,000
$150,000
Contribution margin ratio
60%
Units
Fixed expenses + operating
income
$60,000 +
$30,000
750 units
Contribution margin $ per unit
$120
OR
Units
Sales
$150,000
750 units
Selling price per unit
$200
C)
Actual Sales- Breakeven Sales= Margin of Safety
$175,000 – 100,000 = $75,000
Solution #2
a) Current income statement:
Red
White
Total
Bottles sold
100
40
Average selling price
$80
$45
Total sales
$8,000
$1,800
$9,800
Average cost
$40
$15
Total Cost
$4,000
$600
4,600
Contribution margin
$4,000
$1,200
5,200
Fixed expenses
3,000
Operating income
$2,200
Break-even in Sales Dollars
Red
White
Sales Dollars
8,000
1,800
Total Sales
9,800
9,800
Sales Mix
82%
18%
Spring 2018 Chapter 6 Review Questions
Page 7 of 8
Contribution
Margin
4,000
1,200
Sales
8,000
1,800
Contribution
Margin Ratio
50%
67%
Sales Mix
82%
18%
Total
Weighted Average
Contribution
Margin Ratio
41%
12%
53%
Fixed Cost
3,000
/ Weighted Average
Contribution
Margin Ratio
53%
= Break-even in
Sales Dollars
$
5,653.85
Sales Mix
* Break-even
Break-even in Sales Dollars Per
Product
Red
82%
$ 5,653.85
$
4,615.38
White
18%
$ 5,653.85
$
1,038.46
Break-even in units
Red
White
Units Sold
100
40
Total Units
140
140
Sales Mix
71%
29%
Contribution
Margin per unit
40
30
Sales Mix
71%
29%
Total
Weighted Average
Unit Contribution
Margin
$
28.57
$
8.57
$
37.14
Fixed Cost
3,000
/ Weighted Average
Unit Contribution
Margin
37.14
= Break-even in
Units
80.77
Spring 2018 Chapter 6 Review Questions
Page 8 of 8
Sales Mix
* Break-
even
Break-
even in
unit Per
Product
Verify with Breakeven
in sales dollars
Red
71%
80.77
57.69
80
4615.38
5
White
29%
80.77
23.08
45
1038.46
2
Solution #3
Units Sold
20,000
20,000
Sales
$20.00
$400,000
$20.00
$400,000
Variable
$14.00
280,000
$8.00
160,000
CM
$6.00
140,000
$12.00
240,000
Fixed
96,000
196,000
Net
Income
$44,000
$44,000
Degree of
Operating
Leverage
3.18
5.45
A higher degree of operating leverage exposes a company to greater earnings volatility
risk. They will earn more as sales increase, but have potential to lose more if there is a
decrease in sales.
Solution #4
K Company produces three picnic products: koolers, baskets and grills. Each product
requires a limited resource of materials. In which order should the products be produced
to maximize profits? A product line income statement for the year is shown below:
Koolers
Baskets
Grills
Units Sold
2,000
2,500
1,500
Sales
$360,000
$600,000
$240,000
Variable expenses
198,000
420,000
120,000
CM
162,000
180,000
120,000
CM per unit
81
72
80
Materials
8lbs
6lbs
4lbs
CM per Material
10.13
12
20
Production order: Grills, Baskets, Koolers