CHAPTER 2:
PROFIT PLANNING
Multiple Choice
c
1. Which formula gives unit sales required to earn a target profit? (P = selling price, V = variable cost per unit, F = total fixed costs, T = target profit) a. F/(P - V) b. (F + T)/P c. (F + T)/(P - V) d. (F + T)/V
c
2. Which formula gives the sales dollars required to earn a target profit? (P = selling price, V = variable cost per unit, F = total fixed costs, T = target profit) a. F/[(P - V)/P] b. (F + T)/(P) c. (F + T)/[(P - V)/P] d. F + T/V
d
3. Over the relevant range, total revenues and total costs a. increase, but at a decreasing rate. b. decrease. c. remain constant. d. can be graphed as straight lines.
b
4. At a. b. c. d.
the break-even zero. equal to total equal to total equal to total
c
5. If a. b. c. d.
a company is operating at a loss, fixed costs are greater than sales. selling price is lower than variable cost per unit. selling price is less than average total cost per unit. fixed cost per unit is greater than variable cost per unit.
b
6. As a. b. c. d.
volume increases, average cost per unit increases. decreases. remains constant. increases in proportion to the change in volume.
d
7. All else constant, if the selling price falls, a. total variable costs will be lower than expected. b. contribution margin percentage will be higher than expected. c. total contribution margin will be higher than expected. d. per-unit contribution margin will be lower than expected.
point, total contribution margin is fixed costs. costs. variable costs.
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c
8. If a. b. c. d.
all goes according to plan except that unit variable cost falls, total contribution margin will be lower than expected. the contribution margin percentage will be lower than expected. profit will be higher than expected. per-unit contribution margin will be lower than expected.
a
9. If a. b. c. d.
all goes according to plan except that total fixed costs rise, income will be lower than expected. total contribution margin will be lower than expected. total sales will be lower than expected. income will be higher than expected.
a 10. Which of the following decreases per-unit contribution margin the most for a company currently earning a profit? a. A 10% decrease in selling price. b. A 10% increase in variable cost per unit. c. A 10% increase in fixed costs. d. A 10% increase in fixed cost per unit. c 11. If a. b. c. d.
variable cost as a percentage of sales increases, the contribution margin percentage increases. selling price increases. break-even point in dollars increases. fixed costs decrease.
b 12. Which cost is most likely to be variable for a retailer? a. Advertising. b. Cost of goods sold. c. Sales salaries. d. Rent. a 13. A cost-volume-profit graph reflects relationships a. expected to hold over the relevant range. b. of results over the past few years. c. that the company's managers would like to have happen. d. likely to prevail for the industry. d 14. A multiproduct company a. cannot use CVP analysis. b. must use a separate CVP graph for each of its products. c. can use CVP analysis only if the contribution margin percentages on each product are the same. d. could earn a higher-than-expected profit even though the total number of units sold was less than expected. a 15. If selling price, per-unit variable cost, and total fixed costs are constant, a. the break-even point in units remains constant. b. profit per unit remains constant for all levels of volume within the relevant range. c. total variable costs equal total fixed costs. d. total contribution margin equals total fixed costs.
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b 16. XYZ Company desires a profit of $120,000 and expects to sell 20,000 units. Variable cost per unit is $15 and total fixed costs are $160,000. The selling price must be a. $40. b. $30. c. $26. d. $20. a 17. Contribution margin percentage is 30% and contribution margin per unit is $12. Which of the following is true? a. Variable cost per unit is $28. b. Return on sales is 12%. c. Selling price is $48. d. Variable cost percentage is 12%. b 18. Contribution margin is 30% of sales. Profit is $80,000. Sales are $600,000. Fixed costs are a. $ 90,000. b. $100,000. c. $160,000. d. $180,000. a 19. TRS Company changed production methods, increasing fixed costs and decreasing its per-unit variable costs. The change a. increases risk and increases potential profit. b. increases risk and decreases potential profit. c. decreases risk and decreases potential profit. d. decreases risk and increases potential profit. c 20. Introducing income taxes into cost-volume-profit analysis a. raises the break-even point. b. lowers the break-even point. c. increases unit sales needed to earn a particular target profit. d. decreases the contribution margin percentage. d 21. Selling price is $100, unit variable cost is $68, and fixed costs are $400,000. Unit sales required to earn a $120,000 profit are a. 5,200 b. 7,647 c. 13,700 d. 16,250 c 22. The tax rate is 40%. A company that wants a profit of $120,000 after taxes must earn how much before taxes? a. $ 48,000. b. $ 72,000. c. $200,000. d. $300,000. a 23. Genco Company has a 30% contribution margin percentage and fixed costs of $30,000. To earn a 10% return on sales, Genco must have sales of a. $150,000. b. $100,000. c. $40,000. d. an amount that cannot be determined without more information.
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a 24. If a. b. c. d.
a company is earning a profit, its fixed costs are less than total contribution margin. are equal to total contribution margin. are greater than total variable costs. can be greater than or less than total contribution margin.
a 25. Per-unit variable cost a. remains constant within the relevant b. increases as volume increases within c. decreases as volume increases within d. decreases if volume increases beyond d 26. An a. b. c. d.
range. the relevant range. the relevant range. the relevant range.
increase in the income tax rate raises the break-even point. lowers the break-even point. decreases sales required to earn a particular after-tax profit. increases sales required to earn a particular after-tax profit.
b 27. Contribution margin is a. the same as gross margin. b. revenue minus variable costs. c. revenue minus variable costs and fixed costs. d. the ratio of income to sales. c 28. Classifying a cost as fixed or variable depends on how it behaves a. per unit, as the volume of activity changes. b. in total, as the volume of activity changes. c. both a and b are correct. d. none of the above. d 29. Critical to CVP analysis in a multiproduct company is that a. the products be complementary. b. the products be sold to the same kinds of customers. c. all products have about the same contribution margin percentage. d. the sales mix is relatively constant. a 30. A fixed cost is the same percentage of sales in three different months. Which of the following is true? a. The company had the same sales in each of those months. b. The cost is both fixed and variable. c. The company is operating at its break-even point. d. The company is achieving its target level of profit. c 31. If a. b. c. d.
a company raises its target dollar profit, its break-even point rises. fixed costs increase. required total contribution margin increases. selling price rises.
a 32. If the sales mix shifts toward higher contribution margin products, the break-even point a. decreases. b. increases. c. remains constant. d. it is impossible to tell without more information.
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a 33. In the following graph, revenue is represented by A | * D | * * | * * | * * | * * | * | * * | * * | * * B|*__________*___________________________________ C | * | * | * | * |*______________________________________________ O E a. b. c. d.
the the the the
line OA. line BD. vertical distance between the lines OA and BD. vertical axis.
c 34. In the following graph, the vertical distance between the lines OA and BD represents | A D | * * | * * | * * | * * | * | * * | * * | * * B|*__________* ___________________________ _______ | * | * | * | * |*______________________________________________ O E a. b. c. d.
revenue. total variable cost. profit or loss. total contribution margin.
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C
d 35. In the following graph, total variable costs are represented by A | * D | * * | * * | * * | * * | * | * * | * * | * * B|*__________* ____________________________ ______ C | * | * | * | * |*______________________________________________ O E a. b. c. d.
the the the the
line BD. line BC. vertical distance between the lines OA and BD. vertical distance between the lines BD and BC.
d 36. Target costing is a. a substitute for CVP analysis. b. used by companies that cannot classify their costs by behavior. c. inappropriate if a company has already established a target profit. d. used in decisions to offer a new product or enter a new market. c 37. The break-even point in units equals total fixed costs divided by a. selling price per unit. b. variable cost per unit. c. contribution margin per unit. d. contribution margin percentage. d 38. The break-even point in dollars equals total fixed costs divided by a. selling price per unit. b. variable cost as a percentage of selling price. c. contribution margin per unit. d. contribution margin percentage. c 39. Company A has a lower variable cost per unit and higher total fixed costs than Company B. The selling prices of their products are the same. Sales fluctuate considerably for both companies. Therefore, a. Company A has a lower break-even point than Company B. b. Company A earns more profit than Company B. c. Company A is more risky than Company B. d. Company A has a lower contribution margin percentage than Company B. b 40. The margin of safety is a. the profit currently earned in excess of the target profit. b. the difference between current sales and sales at break-even. c. the ratio of contribution margin to variable cost. d. the difference between contribution margin currently earned and contribution margin at break even.
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a 41. The indifference point is the level of volume at which a company a. earns the same profit under different operating schemes. b. earns no profit. c. earns its target profit. d. any of the above. d 42. Selling price is $40, unit variable cost is $24, and fixed costs are $400,000. Unit sales required to break even are a. 10,000. b. 12,500. c. 16,667. d. 25,000. d 43. ABC's variable costs are 60% of total revenue. If fixed costs are $300,000, what is the break-even sales volume? a. $120,000 b. $180,000 c. $500,00 d. $750,000 b 44. Acme has sales of $200,000, fixed costs of $100,000, and a profit of $20,000. What is Acme's margin of safety? a. $ 20,000 b. $ 33,333 c. $100,000 d. An amount that cannot be determined without more information. b 45. Machine A has fixed costs of $450,000 and a variable cost of $20. Machine B has fixed costs of $600,000 and a variable cost of $14. What is the indifference point, in units? a. 22,500 b. 25,000 c. 42,858 d. An amount that cannot be determined without more information. d 46. DJH Company has sales of $360,000, variable costs of $216,000, and fixed costs of $150,000. To earn a 10% return on sales, DJH must have sales of a. $375,000. b. $440,000. c. $470,000. d. $500,000. b 47. DJH Company has sales of $400,000, variable costs of $240,000, and fixed costs of $150,000. What is the break-even sales volume? a. $150,000 b. $375,000 c. $390,000 d. $550,000
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a 48. Alvarez Inc. sells three products with the following results:
Sales Variable costs
X -----$10,000 4,000
Y -----$20,000 12,000
Z -----$30,000 15,000
What is the weighted average contribution margin percentage? a. 48.3% b. 50.0% c. 51.7% d. Cannot be determined with the information given. c 49. Scottso Enterprises has fixed costs of $120,000. At a sales volume of $400,000, return on sales is 10%; at a $600,000 volume, return on sales is 20%. What is the break-even volume? a. $160,000 b. $210,000 c. $300,000 d. An amount that cannot be determined without more information. d 50. Samson Inc. has a contribution margin percentage of 35%. If fixed costs are $630,000, what is the break-even point? a. $ 220,500 b. $ 409,500 c. $ 969,231 d. $1,800,000
True-False
F
1. Target costing is a technique for classifying costs according to their behavior.
T
2. "Gross profit" and "contribution margin" refer to different things.
F
3. A company that has no variable costs can never break even.
T
4. A company with no fixed costs has a break-even point of zero.
F
5. If a company's income statement shows a positive contribution margin but a net loss, its fixed costs are too high.
T
6. As unit sales increase, both average total cost and fixed cost per unit decrease.
T
7. An increase in contribution margin percentage reduces the break-even point.
F
8. Return on sales is another name for contribution margin percentage.
F
9. Contribution margin is total variable costs minus fixed costs.
T 10. The weighted-average contribution margin percentage changes with changes in sales mix.
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Problems
1. Foris Company's product sells for $16 and has a variable cost per unit of $12. Fixed costs are $120,000. a. Compute the break-even point in dollars. b. Compute the number of units Foris must sell to earn a $30,000 profit. c. Foris has a target profit of $36,000 and expects to sell 30,000 units. Compute the selling price Foris must charge to earn the target profit. d. Foris wants to keep its selling price at $8 per unit and earn a 10% return on sales. Calculate the number of units Foris must sell to meet the target.
SOLUTION: a. $480,000, b. 37,500,
$120,000/25% or $120,000/[($16 - $12)/$16] ($120,000 + $30,000)/($16 - $12)
c. $17.20, d. 50,000,
$12 + [($120,000 + $36,000)/30,000] $120,000/[$16 - $12 - (.10 x $16)] or [$120,000/(25% - 10%)]/$16
2. Dennis Company sells a product for $20, variable costs are $8 per unit, and fixed costs are $32,000. a. What is Dennis' break-even point in units? b. Find the selling price that Dennis must charge to earn an $8,000 profit selling 1,600 units. c. Dennis is considering new equipment that would increase fixed costs by $2,000 while reducing unit variable costs by $1.60 per unit. Find the sales level where Dennis is indifferent between the two cost structures.
SOLUTION: a. 2,667 b. $33.00 Profit $8,000 1,600X X
($32,000/$12)
= = = =
Sales 1,600X $52,800 $33.00
Variable Costs - Fixed Costs $8 x 1,600 - $32,000
c. 1,250 units Current Costs = Proposed Costs $32,000 + $8Q = $34,000 + $6.40Q Q = 1,250
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3. Stout Company sells three products. Planned results for next year follow. Product A B C ---------Selling price $10 $ 8 $ 4 Variable cost 4 6 1 ------Contribution margin $ 6 $ 2 $ 3 === === === Sales mix in dollars 25% 25% 50% Fixed costs are $500,000. a. Compute the weighted-average contribution margin percentage. b. Compute the sales (in $) required to earn a $100,000 profit. c. Suppose now that the sales mix, in UNITS, is 25%, 25%, 50%. the weighted-average contribution-margin per unit.
Determine
d. Determine the total unit sales needed to earn $100,000.
SOLUTION: a. 58.75%
Contribution margin percentage Sales mix in dollars Weighted-average b. $1,021,277
A --60% 25% --15%
B --25% 25% --6.25% +
+
C Total ------75% 50% --37.5% = 58.75%
[($500,000 + $100,000)/.5875]
c. $3.50
Contribution margin per unit Sales mix in units Weighted-average d. 171,429,
A --$6.00 25% ----$1.50
+
B --$2.00 25% ----$0.50
C Total ------$3.00 50% ----+ $1.50 = $3.50
($500,000 + $100,000)/$3.50
4. Maple Company has sales of $550,000 and has variable costs of $330,000. Fixed costs are $180,000. a. Compute the break-even point. b. Compute Maple's sales to earn a $50,000 profit. c. Compute the sales Maple would need to earn a 10% return on sales.
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SOLUTION: a. $450,000
($180,000/40% = $450,000) [CM% = ($550,000 - $330,000)/$550,000 = 40%]
b. $575,000
[($180,000 + $50,000)/40% = $575,000]
c. $600,000
[$180,000/(40% - 10%) = $180,000/30% = $600,000]
5. Acme Company's product sells for $80 and has a variable cost per unit of $60. Fixed costs are $400,000. a. Compute the break-even point in dollars. b. Compute the number of units must Acme sell to earn a $100,000 profit. c. Acme has a target profit of $152,000 and expects to sell 30,000 units. Compute the selling price Acme must charge to earn the target profit. d. Acme wants to keep its selling price at $40 per unit and earn a 10% return on sales. Calculate the number of units Acme must sell to meet the target.
SOLUTION: a. $1,600,000
{$400,000/25% or
$400,000/[($80 - $60)/$80]}
b. 25,000
[($400,000 + $100,000)/($80 - $60)]
c. $78.40
{$60 + [($400,000 + $152,000)/30,000]}
d. 33,333
{$400,000/[$80 - $60 - (.10 x $80)]} or [$400,000/(25% - 10%)]/$80
6. Craik Company sells a product for $25, variable costs are 12 per unit, and fixed costs are $180,000. a. What is Craik's break-even point? b. Find the selling price that Craik must charge to earn a $40,000 profit selling 16,000 units. c. Craik is considering new equipment that would increase fixed costs by $20,000 while reducing unit variable costs by $2.00 per unit. Find the sales level where Craik is indifferent between the two cost structures.
SOLUTION: a. 13,846
($180,000/$13)
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b. $25.75 Profit = Sales - Variable Costs - Fixed Costs $40,000 = 16,000X $12 x 16,000 - $180,000 16,000X = $412,000 X = $25.75 c. 10,000 units Current Costs = Proposed Costs $180,000 + $12Q = $200,000 + $10Q Q = 10,000
7. Mound Company has a before-tax return on sales of 9% and a 25% margin of safety. Current sales are $800,000. a. Calculate break-even sales. b. Find Mound's variable cost percentage.
SOLUTION: a. $600,000
($800,000 x 75%)
b. 64% Sales $800,000 $600,000 $728,000 - $600,000 -------------------$800,000 - $600,000
Total Cost $728,000 $600,000
($800,000 x 91%) break-even
= 64%
8. Cranmore Company sells three products. Planned results are as follows. Product P Q R ------Selling price $20 $8 $6 Variable cost 8 6 3 ------Contribution margin $12 $2 $3 === === === Units sold 10,000 20,000 70,000 Fixed costs are $200,000. a. Determine the weighted-average contribution-margin per unit. b. Determine the break-even point in units sold. c. Compute the total unit sales required to earn a $75,000 profit.
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SOLUTION: a. $3.70
Units sold Mix in units Contribution margin per unit Weighted-average
A --10,000 10%
B --+ 20,000 20%
C Total ------+ 70,000 = 100,000 70%
$12.00 -----$1.20
$2.00 -----+ $0.40
$3.00 -----+ $2.10 = $3.70
b. 54,054
($200,000/$3.70)
c. 74,324
[($200,000 + $75,000)/$3.70]
9. Oak Grove Inc's product sells for $32 and has a variable cost per unit of $20. Fixed costs are $120,000. The effective tax rate is 40%. a. Compute the break-even point. b. Compute the number of units Oak Grove must sell to earn a $30,000 after-tax profit. c. Oak Grove has an after-tax target profit of $36,000 and expects to sell 20,000 units. Compute the selling price Oak Grove must charge to earn the target profit.
SOLUTION: a. 10,000
($120,000/12)
b. 14,167
[($120,000 + $30,000/60%)/12]
c. $29.00
{$20 + [($120,000 + $36,000/60%)/20,000]}
10. Eleva Company has sales of $350,000, variable costs of $200,000, and fixed costs of $125,000. Eleva has an effective tax rate of 40%. a. Compute the break-even point. b. Compute Eleva's sales needed to earn a $75,000 after-tax profit. c. Compute the sales Eleva would need to earn a 15% after-tax return on sales.
SOLUTION: a. $291,647
($125,000/42.86% = $291,647) CM% = ($350,000 - $200,000)/$350,000 = 42.86%
b. $571,629
[($120,000 + $75,000/60%)/42.86%]
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c. $699,888
[$125,000/(42.86% - 25%) = $699,888] before-tax return on sales = 15%/60% = 25%
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