CHAPTER2:PROFITPLANNING

MultipleChoice

c1.Whichformulagivesunitsalesrequiredtoearnatargetprofit?(P=sellingprice,V=variablecostper
unit,F=totalfixedcosts,T=targetprofit)
a.F/(PV)
b.(F+T)/P
c.(F+T)/(PV)
d.(F+T)/V

c2.Whichformulagivesthesalesdollarsrequiredtoearnatargetprofit?(P=sellingprice,V=variable
costperunit,F=totalfixedcosts,T=targetprofit)
a.F/[(PV)/P]
b.(F+T)/(P)
c.(F+T)/[(PV)/P]
d.F+T/V

d3.Overtherelevantrange,totalrevenuesandtotalcosts
a.increase,butatadecreasingrate.
b.decrease.
c.remainconstant.
d.canbegraphedasstraightlines.

b4.Atthebreakevenpoint,totalcontributionmarginis
a.zero.
b.equaltototalfixedcosts.
c.equaltototalcosts.
d.equaltototalvariablecosts.

c5.Ifacompanyisoperatingataloss,
a.fixedcostsaregreaterthansales.
b.sellingpriceislowerthanvariablecostperunit.
c.sellingpriceislessthanaveragetotalcostperunit.
d.fixedcostperunitisgreaterthanvariablecostperunit.

b6.Asvolumeincreases,averagecostperunit
a.increases.
b.decreases.
c.remainsconstant.
d.increasesinproportiontothechangeinvolume.

d7.Allelseconstant,ifthesellingpricefalls,
a.totalvariablecostswillbelowerthanexpected.
b.contributionmarginpercentagewillbehigherthanexpected.
c.totalcontributionmarginwillbehigherthanexpected.
d.perunitcontributionmarginwillbelowerthanexpected.

c8.Ifallgoesaccordingtoplanexceptthatunitvariablecostfalls,
a.totalcontributionmarginwillbelowerthanexpected.
b.thecontributionmarginpercentagewillbelowerthanexpected.
c.profitwillbehigherthanexpected.
d.perunitcontributionmarginwillbelowerthanexpected.

a9.Ifallgoesaccordingtoplanexceptthattotalfixedcostsrise,
a.incomewillbelowerthanexpected.
b.totalcontributionmarginwillbelowerthanexpected.
c.totalsaleswillbelowerthanexpected.
d.incomewillbehigherthanexpected.

a10.Whichofthefollowingdecreasesperunitcontributionmarginthemostforacompanycurrentlyearninga
profit?
a.A10%decreaseinsellingprice.
b.A10%increaseinvariablecostperunit.
c.A10%increaseinfixedcosts.
d.A10%increaseinfixedcostperunit.

c11.Ifvariablecostasapercentageofsalesincreases,the
a.contributionmarginpercentageincreases.
b.sellingpriceincreases.
c.breakevenpointindollarsincreases.
d.fixedcostsdecrease.

b12.Whichcostismostlikelytobevariableforaretailer?
a.Advertising.
b.Costofgoodssold.
c.Salessalaries.
d.Rent.

a13.Acostvolumeprofitgraphreflectsrelationships
a.expectedtoholdovertherelevantrange.
b.ofresultsoverthepastfewyears.
c.thatthecompany'smanagerswouldliketohavehappen.
d.likelytoprevailfortheindustry.

d14.Amultiproductcompany
a.cannotuseCVPanalysis.
b.mustuseaseparateCVPgraphforeachofitsproducts.

4
c.canuseCVPanalysisonlyifthecontributionmarginpercentagesoneachproductarethesame.
d.couldearnahigherthanexpectedprofiteventhoughthetotalnumberofunitssoldwaslessthan
expected.

a15.Ifsellingprice,perunitvariablecost,andtotalfixedcostsareconstant,
a.thebreakevenpointinunitsremainsconstant.
b.profitperunitremainsconstantforalllevelsofvolumewithintherelevantrange.
c.totalvariablecostsequaltotalfixedcosts.
d.totalcontributionmarginequalstotalfixedcosts.

b16.XYZCompanydesiresaprofitof$120,000andexpectstosell20,000units.Variablecostperunitis$16
andtotalfixedcostsare$160,000.Thesellingpricemustbe
a.$40.
b.$30.
c.$26.
d.$20.

a17.Contributionmarginpercentageis30%andcontributionmarginperunitis$12.Whichofthefollowingis
true?
a.Variablecostperunitis$28.
b.Returnonsalesis12%.
c.Sellingpriceis$48.
d.Variablecostpercentageis12%.

b18.Contributionmarginis30%ofsales.Profitis$80,000.Salesare$600,000.Fixedcostsare
a.$90,000.
b.$100,000.
c.$160,000.
d.$180,000.

a19.TRSCompanychangedproductionmethods,increasingfixedcostsanddecreasingitsperunitvariablecosts.
Thechange
a.increasesriskandincreasespotentialprofit.
b.increasesriskanddecreasespotentialprofit.
c.decreasesriskanddecreasespotentialprofit.
d.decreasesriskandincreasespotentialprofit.

c20.Introducingincometaxesintocostvolumeprofitanalysis
a.raisesthebreakevenpoint.
b.lowersthebreakevenpoint.
c.increasesunitsalesneededtoearnaparticulartargetprofit.
d.decreasesthecontributionmarginpercentage.

d21.Sellingpriceis$100,unitvariablecostis$68,andfixedcostsare$400,000.Unitsalesrequiredto
earna$120,000profitare
a.5,200
b.7,647
c.13,700
d.16,250

c22.Thetaxrateis40%.Acompanythatwantsaprofitof$120,000aftertaxesmustearnhowmuchbefore
taxes?
a.$48,000.
b.$72,000.
c.$200,000.
d.$300,000.

a23.GencoCompanyhasa30%contributionmarginpercentageandfixedcostsof$30,000.Toearna10%return
onsales,Gencomusthavesalesof
a.$150,000.
b.$100,000.
c.$40,000.
d.anamountthatcannotbedeterminedwithoutmoreinformation.

a24.Ifacompanyisearningaprofit,itsfixedcosts
a.arelessthantotalcontributionmargin.
b.areequaltototalcontributionmargin.
c.aregreaterthantotalvariablecosts.
d.canbegreaterthanorlessthantotalcontributionmargin.

a25.Perunitvariablecost
a.remainsconstantwithintherelevantrange.
b.increasesasvolumeincreaseswithintherelevantrange.
c.decreasesasvolumeincreaseswithintherelevantrange.
d.decreasesifvolumeincreasesbeyondtherelevantrange.

d26.Anincreaseintheincometaxrate
a.raisesthebreakevenpoint.
b.lowersthebreakevenpoint.
c.decreasessalesrequiredtoearnaparticularaftertaxprofit.
d.increasessalesrequiredtoearnaparticularaftertaxprofit.

b27.Contributionmarginis
a.thesameasgrossmargin.
b.revenueminusvariablecosts.
c.revenueminusvariablecostsandfixedcosts.
d.theratioofincometosales.

5
c28.Classifyingacostasfixedorvariabledependsonhowitbehaves
a.perunit,asthevolumeofactivitychanges.
b.intotal,asthevolumeofactivitychanges.
c.bothaandbarecorrect.
d.noneoftheabove.

d29.CriticaltoCVPanalysisinamultiproductcompanyisthat
a.theproductsbecomplementary.
b.theproductsbesoldtothesamekindsofcustomers.
c.allproductshaveaboutthesamecontributionmarginpercentage.
d.thesalesmixisrelativelyconstant.

a30.Afixedcostisthesamepercentageofsalesinthreedifferentmonths.Whichofthefollowingistrue?
a.Thecompanyhadthesamesalesineachofthosemonths.
b.Thecostisbothfixedandvariable.
c.Thecompanyisoperatingatitsbreakevenpoint.
d.Thecompanyisachievingitstargetlevelofprofit.

c31.Ifacompanyraisesitstargetdollarprofit,its
a.breakevenpointrises.
b.fixedcostsincrease.
c.requiredtotalcontributionmarginincreases.
d.sellingpricerises.

a32.Ifthesalesmixshiftstowardhighercontributionmarginproducts,thebreakevenpoint
a.decreases.
b.increases.
c.remainsconstant.
d.itisimpossibletotellwithoutmoreinformation.

a33.Inthefollowinggraph,revenueisrepresentedby
A
|*D
|**
|**
|**
|**
|*
|**
|**
|**
B|*__________*___________________________________C
|*
|*
|*
|*
|*______________________________________________
OE

a.thelineOA.
b.thelineBD.
c.theverticaldistancebetweenthelinesOAandBD.
d.theverticalaxis.

c34.Inthefollowinggraph,theverticaldistancebetweenthelinesOAandBDrepresents

|AD
|**
|**
|**
|**
|*
|**
|**
|**
B|*__________*__________________________________C
|*
|*
|*
|*
|*______________________________________________
OE

a.revenue.
b.totalvariablecost.
c.profitorloss.
d.totalcontributionmargin.

d35.Inthefollowinggraph,totalvariablecostsarerepresentedby

A
|*D
|**
|**
|**
|**
|*

6
|**
|**
|**
B|*__________*__________________________________C
|*
|*
|*
|*
|*______________________________________________
OE

a.thelineBD.
b.thelineBC.
c.theverticaldistancebetweenthelinesOAandBD.
d.theverticaldistancebetweenthelinesBDandBC.

d36.Targetcostingis
a.asubstituteforCVPanalysis.
b.usedbycompaniesthatcannotclassifytheircostsbybehavior.
c.inappropriateifacompanyhasalreadyestablishedatargetprofit.
d.usedindecisionstoofferanewproductorenteranewmarket.

c37.Thebreakevenpointinunitsequalstotalfixedcostsdividedby
a.sellingpriceperunit.
b.variablecostperunit.
c.contributionmarginperunit.
d.contributionmarginpercentage.

d38.Thebreakevenpointindollarsequalstotalfixedcostsdividedby
a.sellingpriceperunit.
b.variablecostasapercentageofsellingprice.
c.contributionmarginperunit.
d.contributionmarginpercentage.

c39.CompanyAhasalowervariablecostperunitandhighertotalfixedcoststhanCompanyB.Theselling
pricesoftheirproductsarethesame.Salesfluctuateconsiderablyforbothcompanies.Therefore,
a.CompanyAhasalowerbreakevenpointthanCompanyB.
b.CompanyAearnsmoreprofitthanCompanyB.
c.CompanyAismoreriskythanCompanyB.
d.CompanyAhasalowercontributionmarginpercentagethanCompanyB.
b40.Themarginofsafetyis
a.theprofitcurrentlyearnedinexcessofthetargetprofit.
b.thedifferencebetweencurrentsalesandsalesatbreakeven.
c.theratioofcontributionmargintovariablecost.
d.thedifferencebetweencontributionmargincurrentlyearnedandcontributionmarginatbreakeven.

a41.Theindifferencepointisthelevelofvolumeatwhichacompany
a.earnsthesameprofitunderdifferentoperatingschemes.
b.earnsnoprofit.
c.earnsitstargetprofit.
d.anyoftheabove.

d42.Sellingpriceis$40,unitvariablecostis$24,andfixedcostsare$400,000.Unitsalesrequiredto
breakevenare
a.10,000.
b.12,500.
c.16,667.
d.25,000.

d43.ABC'svariablecostsare60%oftotalrevenue.Iffixedcostsare$300,000,whatisthebreakevensales
volume?
a.$120,000
b.$180,000
c.$500,00
d.$750,000

b44.Acmehassalesof$200,000,fixedcostsof$100,000,andaprofitof$20,000.WhatisAcme'smarginof
safety?
a.$20,000
b.$33,333
c.$100,000
d.Anamountthatcannotbedeterminedwithoutmoreinformation.

b45.MachineAhasfixedcostsof$450,000andavariablecostof$20.MachineBhasfixedcostsof$600,000
andavariablecostof$14.Whatistheindifferencepoint,inunits?
a.22,500
b.25,000
c.42,858
d.Anamountthatcannotbedeterminedwithoutmoreinformation.

d46.DJHCompanyhassalesof$360,000,variablecostsof$216,000,andfixedcostsof$150,000.Toearna10%
returnonsales,DJHmusthavesalesof
a.$375,000.
b.$440,000.
c.$470,000.
d.$500,000.

b47.DJHCompanyhassalesof$400,000,variablecostsof$240,000,andfixedcostsof$150,000.Whatisthe

7
 breakevensalesvolume?
a.$150,000
b.$375,000
c.$390,000
d.$550,000

a48.AlvarezInc.sellsthreeproductswiththefollowingresults:

XYZ

Sales$10,000$20,000$30,000
Variablecosts4,00012,00015,000

Whatistheweightedaveragecontributionmarginpercentage?
a.48.3%
b.50.0%
c.51.7%
d.Cannotbedeterminedwiththeinformationgiven.

c49.ScottsoEnterpriseshasfixedcostsof$120,000.Atasalesvolumeof$400,000,returnonsalesis10%;at
a$600,000volume,returnonsalesis20%.Whatisthebreakevenvolume?
a.$160,000
b.$210,000
c.$300,000
d.Anamountthatcannotbedeterminedwithoutmoreinformation.

d50.SamsonInc.hasacontributionmarginpercentageof35%.Iffixedcostsare$630,000,whatisthebreak
evenpoint?
a.$220,500
b.$409,500
c.$969,231
d.$1,800,000

TrueFalse

F1.Targetcostingisatechniqueforclassifyingcostsaccordingtotheirbehavior.

T2."Grossprofit"and"contributionmargin"refertodifferentthings.

F3.Acompanythathasnovariablecostscanneverbreakeven.

T4.Acompanywithnofixedcostshasabreakevenpointofzero.

F5.Ifacompany'sincomestatementshowsapositivecontributionmarginbutanetloss,itsfixedcostsare
toohigh.

T6.Asunitsalesincrease,bothaveragetotalcostandfixedcostperunitdecrease.

T7.Anincreaseincontributionmarginpercentagereducesthebreakevenpoint.

F8.Returnonsalesisanothernameforcontributionmarginpercentage.

F9.Contributionmarginistotalvariablecostsminusfixedcosts.

T10.Theweightedaveragecontributionmarginpercentagechangeswithchangesinsalesmix.

Problems

1.ForisCompany'sproductsellsfor$16andhasavariablecostperunitof$12.Fixedcostsare$120,000.

a.Computethebreakevenpointindollars.

b.ComputethenumberofunitsForismustselltoearna$30,000profit.

c.Forishasatargetprofitof$36,000andexpectstosell30,000units.ComputethesellingpriceForis
mustchargetoearnthetargetprofit.

d.Foriswantstokeepitssellingpriceat$16perunitandearna10%returnonsales.Calculatethe
numberofunitsForismustselltomeetthetarget.

SOLUTION:

a.$480,000,$120,000/25%or$120,000/[($16$12)/$16]

b.37,500,($120,000+$30,000)/($16$12)

c.$17.20,$12+[($120,000+$36,000)/30,000]

d.50,000,$120,000/[$16$12(.10x$16)]
or[$120,000/(25%10%)]/$16

2.DennisCompanysellsaproductfor$20,variablecostsare$8perunit,andfixedcostsare$32,000.

8
a.WhatisDennis'breakevenpointinunits?

b.FindthesellingpricethatDennismustchargetoearnan$8,000profitselling1,600units.

c.Dennisisconsideringnewequipmentthatwouldincreasefixedcostsby$2,000whilereducingunitvariable
costsby$1.60perunit.FindthesaleslevelwhereDennisisindifferentbetweenthetwocost
structures.

SOLUTION:

a.2,667($32,000/$12)

b.$33.00
Profit=SalesVariableCostsFixedCosts
$8,000=1,600X$8x1,600$32,000
1,600X=$52,800
X=$33.00

c.1,250units
CurrentCosts=ProposedCosts
$32,000+$8Q=$34,000+$6.40Q
Q=1,250

3.StoutCompanysellsthreeproducts.Plannedresultsfornextyearfollow.
Product
ABC

Sellingprice$10$8$4
Variablecost461

Contributionmargin$6$2$3
=========
Salesmixindollars25%25%50%

Fixedcostsare$500,000.

a.Computetheweightedaveragecontributionmarginpercentage.

b.Computethesales(in$)requiredtoearna$100,000profit.

c.Supposenowthatthesalesmix,inUNITS,is25%,25%,50%.Determinetheweightedaveragecontribution
marginperunit.

d.Determinethetotalunitsalesneededtoearn$100,000.

SOLUTION:

a.58.75%
ABCTotal

Contributionmarginpercentage60%25%75%
Salesmixindollars25%25%50%

Weightedaverage15%+6.25%+37.5%=58.75%

b.$1,021,277[($500,000+$100,000)/.5875]

c.$3.50

ABCTotal

Contributionmarginperunit$6.00$2.00$3.00
Salesmixinunits25%25%50%

Weightedaverage$1.50+$0.50+$1.50=$3.50

d.171,429,($500,000+$100,000)/$3.50

4.MapleCompanyhassalesof$550,000andhasvariablecostsof$330,000.Fixedcostsare$180,000.

a.Computethebreakevenpoint.

b.ComputeMaple'ssalestoearna$50,000profit.

c.ComputethesalesMaplewouldneedtoearna10%returnonsales.

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]

9
c.$600,000[$180,000/(40%10%)=$180,000/30%=$600,000]

5.AcmeCompany'sproductsellsfor$80andhasavariablecostperunitof$60.Fixedcostsare$400,000.

a.Computethebreakevenpointindollars.

b.ComputethenumberofunitsmustAcmeselltoearna$100,000profit.

c.Acmehasatargetprofitof$152,000andexpectstosell30,000units.ComputethesellingpriceAcme
mustchargetoearnthetargetprofit.

d.Acmewantstokeepitssellingpriceat$40perunitandearna10%returnonsales.Calculatethenumber
ofunitsAcmemustselltomeetthetarget.

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(.10x$80)]}
or[$400,000/(25%10%)]/$80

6.CraikCompanysellsaproductfor$25,variablecostsare12perunit,andfixedcostsare$180,000.

a.WhatisCraik'sbreakevenpoint?

b.FindthesellingpricethatCraikmustchargetoearna$40,000profitselling16,000units.

c.Craikisconsideringnewequipmentthatwouldincreasefixedcostsby$20,000whilereducingunitvariable
costsby$2.00perunit.FindthesaleslevelwhereCraikisindifferentbetweenthetwocost
structures.

SOLUTION:

a.13,846($180,000/$13)

b.$25.75
Profit=SalesVariableCostsFixedCosts
$40,000=16,000X$12x16,000$180,000
16,000X=$412,000
X=$25.75

c.10,000units
CurrentCosts=ProposedCosts
$180,000+$12Q=$200,000+$10Q
Q=10,000

7.MoundCompanyhasabeforetaxreturnonsalesof9%anda25%marginofsafety.Currentsalesare$800,000.

a.Calculatebreakevensales.

b.FindMound'svariablecostpercentage.

SOLUTION:
a.$600,000($800,000x75%)

b.64%

SalesTotalCost
$800,000$728,000($800,000x91%)
$600,000$600,000breakeven

$728,000$600,000
=64%
$800,000$600,000

8.CranmoreCompanysellsthreeproducts.Plannedresultsareasfollows.
Product
PQR

Sellingprice$20$8$6
Variablecost863

Contributionmargin$12$2$3
=========
Unitssold10,00020,00070,000

10
Fixedcostsare$200,000.

a.Determinetheweightedaveragecontributionmarginperunit.

b.Determinethebreakevenpointinunitssold.

c.Computethetotalunitsalesrequiredtoearna$75,000profit.

SOLUTION:

a.$3.70
ABCTotal

Unitssold10,000+20,000+70,000=100,000
Mixinunits10%20%70%

Contributionmarginperunit$12.00$2.00$3.00

Weightedaverage$1.20+$0.40+$2.10=$3.70

b.54,054($200,000/$3.70)

c.74,324[($200,000+$75,000)/$3.70]

9.OakGroveInc'sproductsellsfor$32andhasavariablecostperunitof$20.Fixedcostsare$120,000.The
effectivetaxrateis40%.

a.Computethebreakevenpoint.

b.ComputethenumberofunitsOakGrovemustselltoearna$30,000aftertaxprofit.

c.OakGrovehasanaftertaxtargetprofitof$36,000andexpectstosell20,000units.Computetheselling
priceOakGrovemustchargetoearnthetargetprofit.

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.ElevaCompanyhassalesof$350,000,variablecostsof$200,000,andfixedcostsof$125,000.Elevahasan
effectivetaxrateof40%.

a.Computethebreakevenpoint.

b.ComputeEleva'ssalesneededtoearna$75,000aftertaxprofit.

c.ComputethesalesElevawouldneedtoearna15%aftertaxreturnonsales.

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%]

c.$699,888[$125,000/(42.86%25%)=$699,888]
beforetaxreturnonsales=15%/60%=25%

11