## Easy Practice Test

1. Cost volume profit analysis requires that costs are categorized as

a. product or perioda. product or period
b. committed or discretionary
c. fixed, mixed, or variable
d. fixed or variable

D. Costs must be categorized as fixed or variable. Fixed costs will remain constant as volume changes and variable will be constant per unit and will change in total proportionately with changes in volume.

2. Cost volume profit analysis assumes that fixed costs

a. remain constant from one year to the next
b. do not change in total as volume changes
c. behave in the same way that variable costs behave
d. do not change per unit as volume changes

B. Fixed costs do not change in total as volume changes, and do change per unit as volume changes. Most fixed costs will change at least by a minor amount from year to year. Fixed costs behave opposite to variable costs.

3. At break even point, the fixed costs are always

a. more than the variable costs
b. equal to the contribution margin
c. greater than sales
d. more than contribution margin

B. Using the formula: Sales – VC = CM – FC = Profit with breakeven giving a 0 profit, fixed costs must be equal to contribution margin to give 0 profit.

4. The margin of safety is

a. the same thing as the contribution margin ratio
b. the difference between budgeted contribution margin and actual CM
c. the difference between budgeted sales and break even sales
d. the difference between actual sales and budgeted sales

C. By definition the margin of safety is the difference in budgeted sales or the current actual sales and the break even sales for the period. It is the amount that sales can decrease and the company will still not incur a loss.

5. The company’s sales are \$200,000, variable costs are \$120,000 and fixed costs are \$25,000. If sales increase by 10%, what will operating income be?

a. \$75,000
b. \$60,500
c. \$65,000
d. \$63,000

D. Sales will be \$220,000 if increased by 10%, variable costs will also increase by 10% and will be \$132,000, fixed costs will not change at \$25,000, which gives a profit of \$63,000. Variable costs change at the same rate as sales change.

6. When preparing a contribution margin income statement

a. net income + fixed costs = contribution margin
b. variable costs are grouped together and fixed costs are grouped together
c. you can determine how profit will change as sales volume changes
d. all of the above

D. All of the above are true for a contribution margin income statement which shows: Sales – VC = CM – FC = Profit

7. Contribution margin per unit is equal to

a. sales per unit less variable cost in total
b. sales in total less fixed cost per unit
c. sales in total less fixed cost in total divided by total units
d. sales in total less variable costs in total divided by total units

D. Because variable costs change in the same proportion as sales the CM per unit can be determined by using the formula in D.You must have consistent unit less unit to get CM per unit. Fixed costs are not used to determine contribution margin.

8. Total contribution margin is equal to

a. fixed costs plus variable costs
b. fixed costs less variable costs
c. sales – variable costs
d. sales – fixed costs

C. Contribution margin is equal to sales less variable costs

9. A company will be at break even when

a. fixed cost equals contribution margin
b. revenues equal fixed cost and there are variable costs
c. revenues less variable costs equals fixed costs
d. either a. or c.

D. Use the formula: Sales – VC = CM – FC = profit and make profit 0 which is break even.

10. When fixed costs increase

a. the number of units required to break even will increase
b. the number of units required to break even will decrease
c. the number of units required to break even will not change
d. fixed costs never increase in total for the company

A. As fixed costs increase, the number of units that must be sold so that contribution margin from those units can cover the fixed costs increases. Fixed costs in total for the company may increase if the company adds to budgeted costs or adds different types of fixed costs.

11. The company manufactures one product and sells that product for \$12. Costs are: production costs \$3.50 per unit, selling costs \$0.40 per unit, fixed production costs are \$60,000 and fixed administrative and selling costs are \$90,000. The company sold 20,000 products.

Determine:

a. Contribution margin per unit
b. Contribution margin ratio
c. Break – even in units
d. Break – even in sales dollars
e. How many units must be sold to have before tax profit of \$250,000
f. Required sales dollars to achieve a before tax profit of \$400,000
g. Margin of safety in dollars and units
h. Operating leverage and the % income will increase if sales increase 18%

1st – Identify the sales price as \$12 per unit

2nd – Identify the variable costs: per unit always means variable

variable production costs              \$3.50 per
variable selling                                 \$0.40 per
total variable                                    \$3.90 per

3rd – Contribution margin per unit is \$12 sales – \$3.90 variable cost = \$8.10 per unit

4th – Contribution margin ratio is \$8.10 CM / \$12 sales = 67.5% or .675

5th – Total fixed costs are \$60,000 + \$90,000 = \$150,000

You should follow these steps for all problems.

a. The CM is \$8.10 per unit

b. The CM ratio % is .675 or 67.5%

c. The break even formula is Total Fixed Costs = units sold to B/E
CM per unit

Plug in the numbers        \$150,000            = 18,519 to get B/E
\$8.10 per unit      units

d. The break even formula is   Total Fixed Costs = sales \$ sold to B/E
CM %

Plug in the numbers         \$150,000 = \$222,222 to get B/E
.675

For e. and f., add the desired profit to the break even formula:

e. The formula is                 Total Fixed Costs + Desired Profit = units sold
CM per unit

Plug in the numbers         \$150,000 + \$250,000 = 49,383 to earn \$250,000
\$8.10 per unit

f. The formula is Total Fixed Costs + Profit = sales \$ sold CM %

Plug in the numbers         \$150,000 + \$400,000 = \$814,815 to earn \$400,000
.675

g. Margin of Safety formula is

Units         Sales \$
Current sales                     20,000         \$240,000
– Break-even sales            18,519          \$222,222
Margin of Safety                  1,481         \$ 17,778

h. To calculate operating leverage, you must use a contribution margin format.

Reformat the above information.

Sales                 \$240,000 (20,000 x \$12)
– all VC              \$ 78,000 (20,000 x \$3.90)
= CM                 \$ 162,000
– all FC              \$ 150,000 given
= Income         \$ 12,000

You must have total contribution margin to work this formula. You can also get total CM \$ by taking CM per unit of \$8.10 x 20,000 units sold = \$162,000

The operating leverage formula is        Contribution Margin
Income

Plug in the numbers:                 162,000 / 12,000 = 13.5 factor

To get the % income is expected to increase is sales increase do the following:

Sales % increase                           18%
x operating leverage factor        13.5
= % income will increase           243%

12. A company has the following:

Sales (10,000 units sold)                    \$500,000
Fixed Costs                                           \$128,000
Variable Costs                                      \$284,000

Determine:

a. Contribution margin per unit
b. Contribution margin ratio
c. Break – even in units
d. Break – even in sales dollars
e. How many units must be sold to have before tax profit of \$50,000
f. Required sales dollars to achieve a before tax profit of \$75,000
g. Margin of safety in dollars and units
h. Operating leverage

1st – Identify the sales price as \$50 per unit (\$500,000 / 10,000)

2nd – Identify the variable costs and get the cost per unit

\$284,000 / 10,000 units = \$28.40 per unit

3rd – Contribution margin per unit is \$50 sales – \$28.40 variable cost = \$21.60 per unit

4th – Contribution margin ratio is \$21.60 CM / \$50 sales = 43.2% or .432

5th – Total fixed costs are \$128,000

You should follow these 5 steps for all problems.

a. The CM is \$21.60 per unit

b. The CM ratio % is 43.2%

c. The break even formula is Total Fixed Costs = units sold to B/E
CM per unit

\$128,000 = 5,926 units to get B/E
\$21.60 per unit

d. The break even formula is Total Fixed Costs = sales \$ sold to B/E
CM %

\$128,000 = \$ 296,296 to get B/E
.432

For e. and f. add the desired profit to the break-even formula:

e. The formula is Total Fixed Costs + Desired Profit = units sold
CM per unit

\$128,000 + \$50,000 = 8,241 units to earn \$50,000
\$21.60 per unit

f. The formula is Total Fixed Costs + Profit = sales \$ sold
CM %

\$128,000 + \$75,000 = \$ 469,907 to earn \$75,000
.432

g. Margin of Safety formula is

Units                Sales \$
Current sales                         10,000             \$500,000
– Break-even sales                 5,926               \$296,296
Margin of Safety                    4,074               \$203,704

h. To calculate operating leverage, you must use a contribution margin format.

Format the above information like this.

Sales                \$500,000
– all VC             \$284,000
= CM                \$ 216,000 (10,000 x \$21.60)
– all FC             \$ 128,000
= Income        \$ 88,000

You must have total contribution margin to work this formula.

The operating leverage formula is         Contribution Margin
Income
216,000 / 88,000 = 2.45 factor

13. A service company incurred the following sales and costs:

Sales                                                                            \$760,000
Fixed selling costs                                                      \$ 84,000
Depreciation                                                                \$ 20,000
Salaries                                                                        \$165,000
Selling costs that change as sales change              \$28,000
Variable Cost of providing services                        \$262,000
Services provided                                                   8,000 units

Determine:

a. Contribution margin per unit
b. Contribution margin ratio
c. Break – even in units and sales dollars
d. Units and sales dollars required to earn \$500,000
e. Margin of safety in dollars and units
f. Operating leverage
g. The expected income if sales increase 20%

1st – Identify the sales price as \$95 per unit (\$760,000 / 8,000 units)

2nd – Identify the variable costs as follows:

variable service cost \$262,000
variable selling \$ 28,000
total variable \$290,000 / 8,000 units = \$36.25 per unit

3rd – Contribution margin per unit is
\$95 sales – \$36.25 variable cost = \$58.75 per unit

4th – Contribution margin ratio is
\$58.75 CM / \$95 sales = 61.8% or .618

5th – Total fixed costs are
\$116,000 + \$84,000 + \$20,000 + \$165,000 = \$385,000
Depreciation and salaries are fixed costs.

You should follow these 5 steps for all problems.

a. The CM is \$58.75 per unit
b. The CM ratio % is 61.8%
c. The break even formula is

Total Fixed Costs         = units sold to B/E
CM per unit

\$385,000               = 6,553 units to get B/E
\$58.75 per unit

The break even formula is

Total Fixed Costs      = sales \$ sold to B/E
CM %

\$385,000       = \$ 622,977 sales to get B/E
.618

For d. add the desired profit to the break even formula:

d. The formula is  Total Fixed Costs + Desired Profit    = units sold
CM per unit

\$385,000 + \$500,000    = 15,064 to earn \$500,000
\$58.75 per unit

The formula is   Total Fixed Costs + Profit = sales \$ sold
CM %

\$385,000 + \$500,000 = \$ 1,432,039 to earn \$500,000
.618

e. Margin of Safety formula is

Units                    Sales \$
Current sales                     8,000               \$760,000
– Break-even sales            6,553               \$622,977
Margin of Safety               1,447               \$137,023

f. To calculate operating leverage, you must use a contribution margin format.

Sales               \$760,000
– all VC            \$290,000
= CM               \$470,000 (8,000 x \$58.75)
– all FC             \$385,000
= Income        \$ 85,000

The operating leverage formula is

Contribution Margin
Income

470,000 / 85,000 = 5.529 factor

g. To get the % income is expected to increase as sales increase do the following:

Sales % increase                                 20%
x operating leverage factor              5.529
= % income will increase                 110.58%

Use the % income will increase to determine the income if sales go up 20%

Current Income                          \$85,000
x % income will increase             1.1058