**TRUE-FALSE STATEMENTS**

1. The CVP income statement classifies costs as variable or fixed and computes a Contribution margin.

2. In CVP analysis, cost includes manufacturing costs but not selling and administrative expenses.

3. When a company is in its early stages of operation, its primary goal is to generate a target net income.

4. The margin of safety tells a company how far sales can drop before it will be operating at a loss.

5. Sales mix is a measure of the percentage increase in sale from period to period.

6. Sales mix is not important to managers when different products have substantially different contribution margins.

7. The weighted-average contribution margin of all the products is computed when determining the break-even sales for a multi-product firm.

8. If Buttercup, Inc. sells two products with a sales mix of 75% : 25%, and the respective contribution margins are $80 and $240, then weighted-average unit contribution margin is $120.

9. If fixed costs are $100,000 and weighted-average unit contribution margin is $50, then the break-even point in units is 2,000 units.

10. Net income can be increased or decreased by changing the sales mix.

11. The break-even point in dollars is variable costs divided by the weighted-average contribution margin ratio.

12. When a company has limited resources, management must decide which products to make and sell in order to maximize net income.

13. When a company has limited resources to manufacture products, it should manufacture those products which have the highest contribution margin per unit.

14. If a company has limited machine hours available for production, it is generally more profitable to produce and sell the product with the highest contribution margin per machine hour.

15. According to the theory of constraints, a company must identify its constraints and find ways to reduce or eliminate them.

16. Cost structure refers to the relative proportion of fixed versus variable costs that a company incurs.

17. Operatin leverage refers to the extent to which a company’s net income reacts to a given change in fixed costs.

18. The degree of operating leverage provides a measure of a company’s earnings volatility.

19. If Sprinkle Industries has a margin of safety ratio of .60, it could sustain a 60 percent decline in sales before it would be operating at a loss.

20. A company with low operating leverage will experience a sharp increase in net income with a given increase in sales.

^{a}21. Variable Costing is the approach used for external reporting under generally accepted accounting principles.

^{a}22. The difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead.

^{a}23. Selling and administrative costs are period costs under both absorption and variable costing.

^{a}24. Manufacturing cost per unit will be higher under variable costing than under absorption costing.

^{a}25. Some fixed manufacturing costs of the current period are deferred to future periods through ending inventory under variable costing.

^{a}26. When units produced exceed units sold, income under absorption costing is higher than income under variable costing.

^{a}27. When units sold exceed units produced, income under absorption costing is higher than income under variable costing.

^{a}28. When absorption costing is used for external reporting, variable costing can still be used for internal reporting purposes.

^{a}29. When absorption costing is used, management may be tempted to overproduce in a given period in order to increase net income.

^{a}30. The use of absorption costing facilitates cost-volume-profit analysis.

**MULTIPLE CHOICE QUESTIONS**

** 31. Cost-volume-profit analysis is the study of the effects of**

a. changes in costs and volume on a company’s profit.

b. cost, volume, and profit on the cash budget.

c. cost, volume, and profit on various ratios.

d. changes in costs and volume on a company’s profitability ratios.

**32. The CVP income statement classifies costs**

a. as variable or fixed and computes contribution margin.

b. by function and computes a contribution margin.

c. as variable or fixed and computes gross margin.

d. by function and computes a gross margin.

** 33. Contribution margin is the amount of revenue remaining after deducting**

a. cost of goods sold.

b. fixed costs.

c. variable costs.

d. contra-revenue.

**34. Moonwalker’s CVP income statement included sales of 4,000 units, a selling price of $100, variable expenses of $60 per unit, and fixed expenses of $88,000. Contribution margin is**

a. $400,000.

b. $240,000.

c. $160,000.

d. $72,000.

** 35. Moonwalker’s CVP income statement included sales of 4,000 units, a selling price of $100, variable expenses of $60 per unit, and fixed expenses of $88,000. Net income is**

a. $400,000.

b. $160,000.

c. $152,000.

d. $72,000.

** 36. For Buffalo Co., at a sales level of 5,000 units, sales is $75,000, variable expenses total $50,000, and fixed expenses are $21,000. What is the contribution margin per unit?**

a. $4.20

b. $5.00

c. $10.00

d. $15.00

** 37. If contribution margin is $120,000, sales is $300,000, and net income is $40,000, then variable and fixed expenses are**

Variable Fixed

a. $180,000 $260,000

b. $180,000 $80,000

c. $80,000 $180,000

d. $420,000 $260,000

**38. In a CVP income statement, cost of goods sold is generally**

a. completely a variable cost.

b. completely a fixed cost.

c. neither a variable cost nor a fixed cost.

d. partly a variable cost and partly a fixed cost.

** 39. In a CVP income statement, a selling expense is generally**

a. completely a variable cost.

b. completely a fixed cost.

c. neither a variable cost nor a fixed cost.

d. partly a variable cost and partly a fixed cost.

** 40. Hinge Manufacturing’s cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company’s sales is $1,480,000, what is its contribution margin?**

a. $160,000

b. $760,000

c. $820,000

d. $880,000

** 41. Hinge Manufacturing’s cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company’s sales is $1,480,000, what is its net income?**

a. $160,000

b. $760,000

c. $820,000

d. $880,000

** 42. Woolford’s CVP income statement included sales of 4,000 units, a selling price of $50, variable expenses of $30 per unit, and net income of $25,000. Fixed expenses are**

a. $55,000.

b. $80,000.

c. $120,000.

d. $200,000.

** 43. The contribution margin ratio is**

a. sales divided by contribution margin.

b. sales divided by fixed expenses.

c. sales divided by variable expenses.

d. contribution margin divided by sales.

** 44. For Pierce Company, sales is $500,000, variable expenses are $330,000, and fixed expenses are $140,000. Pierce’s contribution margin ratio is**

a. 10%.

b. 28%.

c. 34%.

d. 66%.

** 45. For Sanborn Co., sales is $1,000,000, fixed expenses are $300,000, and the contribution margin per unit is $48. What is the break-even point?**

a. $2,083,334 sales dollars

b. $625,000 sales dollars

c. 20,834 units

d. 6,250 units

**46. For Franklin, Inc., sales is $1,500,000, fixed expenses are $450,000, and the contribution margin ratio is 36%. What is net income?**

a. $90,000

b. $162,000

c. $378,000

d. $540,000

** 47. For Franklin, Inc., sales is $1,500,000, fixed expenses are $450,000, and the contribution margin ratio is 36%. What are the total variable expenses?**

a. $288,000

b. $540,000

c. $960,000

d. $1,500,000

** 48. In 2013, Teller Company sold 3,000 units at $400 each. Variable expenses were $280 per unit, and fixed expenses were $160,000. What was Teller’s 2013 net income?**

a. $200,000

b. $360,000

c. $840,000

d. $1,200,000

** 49. In 2012, Teller Company sold 3,000 units at $400 each. Variable expenses were $280 per unit, and fixed expenses were $180,000. The same selling price, variable expenses, and fixed expenses are expected for 2013. What is Teller’s break-even point in sales dollars for 2013?**

a. $600,000

b. $1,800,000

c. $1,200,000

d. $1,714,286

** 50. In 2012, Teller Company sold 3,000 units at $400 each. Variable expenses were $280 per unit, and fixed expenses were $180,000. The same selling price, variable expenses, and fixed expenses are expected for 2013. What is Teller’s break-even point in units for 2013?**

a. 1,500

b. 3,375

c. 4,500

d. 7,500

** 51. The required sales in units to achieve a target net income is**

a. (sales + target net income) divided by contribution margin per unit.

b. (sales + target net income) divided by contribution margin ratio.

c. (fixed cost + target net income) divided by contribution margin per unit.

d. (fixed cost + target net income) divided by contribution margin ratio.

** 52. For Wickham Co., sales is $2,000,000, fixed expenses are $600,000, and the contribution margin ratio is 36%. What is required sales in dollars to earn a target net income of $400,000?**

a. $1,111,111

b. $1,666,666

c. $2,777,778

d. $5,555,556

** 53. Warner Manufacturing reported sales of $2,000,000 last year (100,000 units at $20 each), when the break-even point was 75,000 units. Warner’s margin of safety ratio is**

a. 25%.

b. 33%.

c. 75%.

d. 125%.

** 54. For Wilder Corporation, sales is $1,200,000 (6,000 units), fixed expenses are $360,000, and the contribution margin per unit is $80. What is the margin of safety in dollars?**

a. $60,000

b. $300,000

c. $540,000

d. $840,000

** 55. Margin of safety in dollars is**

a. expected sales divided by break-even sales.

b. expected sales less break-even sales.

c. actual sales less expected sales.

d. expected sales less actual sales.

** 56. The margin of safety ratio is**

a. expected sales divided by break-even sales.

b. expected sales less break-even sales.

c. margin of safety in dollars divided by expected sales.

d. margin of safety in dollars divided by break-even sales.

** 57. In 2012, Hagar Corp. sold 3,000 units at $500 each. Variable expenses were $350 per unit, and fixed expenses were $455,000. The same variable expenses per unit and fixed expenses are expected for 2013. If Hagar cuts selling price by 4%, what is Hagar’s break-even point in units for 2013?**

a. 3,033

b. 3,159

c. 3,360

d. 3,500

** 58. In 2012, Carow sold 3,000 units at $500 each. Variable expenses were $250 per unit, and fixed expenses were $250,000. The same selling price is expected for 2013. Carow is tentatively planning to invest in equipment that would increase fixed costs by 20%, while decreasing variable costs per unit by 20%. What is Carow’s break-even point in units for 2013?**

a. 1,000

b. 1,200

c. 1,250

d. 1,500

**59. In 2012, Raleigh sold 1,000 units at $500 each, and earned net income of $50,000. Variable expenses were $300 per unit, and fixed expenses were $150,000. The same selling price is expected for 2013. Raleigh’s variable cost per unit will rise by 10% in 2013 due to increasing material costs, so they are tentatively planning to cut fixed costs by $15,000. How many units must Raleigh sell in 2013 to maintain the same income level as 2012?**

a. 794

b. 971

c. 1,176

d. 1,088

** 60. Sales mix is**

a. the relative percentage in which a company sells its multiple products.

b. the trend of sales over recent periods.

c. the mix of variable and fixed expenses in relation to sales.

d. a measure of leverage used by the company.

**More Questions are Included**

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