Chapter 3 Cost-Volume-Profit Analysis
Objective 3.1
1) Cost-volume-profit analysis is used primarily by management:
A) as a planning tool
B) for control purposes
C) to prepare external financial statements
D) to attain accurate financial results
Answer: A
Diff: 1
Terms: cost-volume-profit (CVP)
Objective: 1
AACSB: Communication
2) One of the first steps to take when using CVP analysis to help make decisions is:
A) finding out where the total costs line intersects with the total revenues line on a graph.
B) identifying which costs are variable and which costs are fixed.
C) calculation of the degree of operating leverage for the company.
D) estimating how many products will have to be sold to make a decent profit.
Answer: B
Diff: 1
Terms: cost-volume-profit (CVP) analysis
Objective: 1
AACSB: Reflective thinking
3) Cost-volume-profit analysis assumes all of the following EXCEPT:
A) all costs are variable or fixed
B) units manufactured equal units sold
C) total variable costs remain the same over the relevant range
D) total fixed costs remain the same over the relevant range
Answer: C
Diff: 2
Terms: cost-volume-profit (CVP)
Objective: 1
AACSB: Reflective thinking
1
Copyright © 2012 Pearson Education, Inc.
,4) Which of the following items is NOT an assumption of CVP analysis?
A) Total costs can be divided into a fixed component and a component that is variable with respect to
the level of output.
B) When graphed, total costs curve upward.
C) The unit-selling price is known and constant.
D) All revenues and costs can be added and compared without taking into account the time value of
money.
Answer: B
Diff: 3
Terms: cost-volume-profit (CVP)
Objective: 1
AACSB: Reflective thinking
5) Which of the following items is NOT an assumption of CVP analysis?
A) Costs may be separated into separate fixed and variable components.
B) Total revenues and total costs are linear in relation to output units.
C) Unit selling price, unit variable costs, and unit fixed costs are known and remain constant.
D) Proportion of different products will remain constant when multiple products are sold.
Answer: C
Diff: 3
Terms: cost-volume-profit (CVP)
Objective: 1
AACSB: Reflective thinking
6) A revenue driver is defined as:
A) any factor that affects costs and revenues
B) any factor that affects revenues
C) only factors that can influence a change in selling price
D) only factors that can influence a change in demand
Answer: B
Diff: 1
Terms: revenue driver
Objective: 1
AACSB: Reflective thinking
7) Operating income calculations use:
A) net income
B) income tax expense
C) cost of goods sold and operating costs
D) nonoperating revenues and nonoperating expenses
Answer: C
Diff: 2
Terms: revenue driver
Objective: 1
AACSB: Reflective thinking
2
Copyright © 2012 Pearson Education, Inc.
,8) Which of the following statements about net income (NI) is true?
A) NI = operating income plus nonoperating revenue.
B) NI = operating income plus operating costs.
C) NI = operating income less income taxes.
D) NI = operating income less cost of goods sold.
Answer: C
Diff: 1
Terms: net income
Objective: 1
AACSB: Reflective thinking
9) Which of the following is true about the assumptions underlying basic CVP analysis?
A) Only selling price is known and constant.
B) Only selling price and variable cost per unit are known and constant.
C) Only selling price, variable cost per unit, and total fixed costs are known and constant.
D) Selling price, variable cost per unit, fixed cost per unit, and total fixed costs are known and constant.
Answer: C
Diff: 2
Terms: cost-volume-profit (CVP)
Objective: 1
AACSB: Reflective thinking
10) The contribution income statement:
A) reports gross margin
B) is allowed for external reporting to shareholders
C) categorizes costs as either direct or indirect
D) can be used to predict future profits at different levels of activity
Answer: D
Diff: 1
Terms: contribution income statement
Objective: 1
AACSB: Reflective thinking
11) Contribution margin equals:
A) revenues minus period costs
B) revenues minus product costs
C) revenues minus variable costs
D) revenues minus fixed costs
Answer: C
Diff: 1
Terms: contribution margin
Objective: 1
AACSB: Reflective thinking
3
Copyright © 2012 Pearson Education, Inc.
, Answer the following questions using the information below:
Sherry's Custom Jewelry sells a single product. 700 units were sold resulting in $7,000 of sales revenue,
$2,800 of variable costs, and $1,200 of fixed costs.
12) Contribution margin per unit is:
A) $4.00
B) $4.29
C) $6.00
D) None of these answers are correct.
Answer: C
Explanation: C) ($7,000 - $2,800) / 700 units = $6 per unit
Diff: 2
Terms: contribution margin per unit
Objective: 1
AACSB: Analytical skills
13) If sales increase by $25,000, operating income will increase by:
A) $10,000
B) $15,000
C) $22,200
D) None of these answers are correct.
Answer: B
Explanation: B) [($7,000 - $2,800) / $7,000] × $25,000 = $15,000
Diff: 2
Terms: cost-volume-profit (CVP) analysis
Objective: 1
AACSB: Analytical skills
Answer the following questions using the information below:
Holly's Ham, Inc. sells hams during the major holiday seasons. During the current year 11,000 hams
were sold resulting in $220,000 of sales revenue, $55,000 of variable costs, and $24,000 of fixed costs.
14) Contribution margin per ham is:
A) $5.00
B) $15.00
C) $20.00
D) None of these answers are correct.
Answer: B
Explanation: B) ($220,000 - $55,000) / 11,000 hams = $15 per ham
Diff: 2
Terms: contribution margin per unit
Objective: 1
AACSB: Analytical skills
4
Copyright © 2012 Pearson Education, Inc.
Objective 3.1
1) Cost-volume-profit analysis is used primarily by management:
A) as a planning tool
B) for control purposes
C) to prepare external financial statements
D) to attain accurate financial results
Answer: A
Diff: 1
Terms: cost-volume-profit (CVP)
Objective: 1
AACSB: Communication
2) One of the first steps to take when using CVP analysis to help make decisions is:
A) finding out where the total costs line intersects with the total revenues line on a graph.
B) identifying which costs are variable and which costs are fixed.
C) calculation of the degree of operating leverage for the company.
D) estimating how many products will have to be sold to make a decent profit.
Answer: B
Diff: 1
Terms: cost-volume-profit (CVP) analysis
Objective: 1
AACSB: Reflective thinking
3) Cost-volume-profit analysis assumes all of the following EXCEPT:
A) all costs are variable or fixed
B) units manufactured equal units sold
C) total variable costs remain the same over the relevant range
D) total fixed costs remain the same over the relevant range
Answer: C
Diff: 2
Terms: cost-volume-profit (CVP)
Objective: 1
AACSB: Reflective thinking
1
Copyright © 2012 Pearson Education, Inc.
,4) Which of the following items is NOT an assumption of CVP analysis?
A) Total costs can be divided into a fixed component and a component that is variable with respect to
the level of output.
B) When graphed, total costs curve upward.
C) The unit-selling price is known and constant.
D) All revenues and costs can be added and compared without taking into account the time value of
money.
Answer: B
Diff: 3
Terms: cost-volume-profit (CVP)
Objective: 1
AACSB: Reflective thinking
5) Which of the following items is NOT an assumption of CVP analysis?
A) Costs may be separated into separate fixed and variable components.
B) Total revenues and total costs are linear in relation to output units.
C) Unit selling price, unit variable costs, and unit fixed costs are known and remain constant.
D) Proportion of different products will remain constant when multiple products are sold.
Answer: C
Diff: 3
Terms: cost-volume-profit (CVP)
Objective: 1
AACSB: Reflective thinking
6) A revenue driver is defined as:
A) any factor that affects costs and revenues
B) any factor that affects revenues
C) only factors that can influence a change in selling price
D) only factors that can influence a change in demand
Answer: B
Diff: 1
Terms: revenue driver
Objective: 1
AACSB: Reflective thinking
7) Operating income calculations use:
A) net income
B) income tax expense
C) cost of goods sold and operating costs
D) nonoperating revenues and nonoperating expenses
Answer: C
Diff: 2
Terms: revenue driver
Objective: 1
AACSB: Reflective thinking
2
Copyright © 2012 Pearson Education, Inc.
,8) Which of the following statements about net income (NI) is true?
A) NI = operating income plus nonoperating revenue.
B) NI = operating income plus operating costs.
C) NI = operating income less income taxes.
D) NI = operating income less cost of goods sold.
Answer: C
Diff: 1
Terms: net income
Objective: 1
AACSB: Reflective thinking
9) Which of the following is true about the assumptions underlying basic CVP analysis?
A) Only selling price is known and constant.
B) Only selling price and variable cost per unit are known and constant.
C) Only selling price, variable cost per unit, and total fixed costs are known and constant.
D) Selling price, variable cost per unit, fixed cost per unit, and total fixed costs are known and constant.
Answer: C
Diff: 2
Terms: cost-volume-profit (CVP)
Objective: 1
AACSB: Reflective thinking
10) The contribution income statement:
A) reports gross margin
B) is allowed for external reporting to shareholders
C) categorizes costs as either direct or indirect
D) can be used to predict future profits at different levels of activity
Answer: D
Diff: 1
Terms: contribution income statement
Objective: 1
AACSB: Reflective thinking
11) Contribution margin equals:
A) revenues minus period costs
B) revenues minus product costs
C) revenues minus variable costs
D) revenues minus fixed costs
Answer: C
Diff: 1
Terms: contribution margin
Objective: 1
AACSB: Reflective thinking
3
Copyright © 2012 Pearson Education, Inc.
, Answer the following questions using the information below:
Sherry's Custom Jewelry sells a single product. 700 units were sold resulting in $7,000 of sales revenue,
$2,800 of variable costs, and $1,200 of fixed costs.
12) Contribution margin per unit is:
A) $4.00
B) $4.29
C) $6.00
D) None of these answers are correct.
Answer: C
Explanation: C) ($7,000 - $2,800) / 700 units = $6 per unit
Diff: 2
Terms: contribution margin per unit
Objective: 1
AACSB: Analytical skills
13) If sales increase by $25,000, operating income will increase by:
A) $10,000
B) $15,000
C) $22,200
D) None of these answers are correct.
Answer: B
Explanation: B) [($7,000 - $2,800) / $7,000] × $25,000 = $15,000
Diff: 2
Terms: cost-volume-profit (CVP) analysis
Objective: 1
AACSB: Analytical skills
Answer the following questions using the information below:
Holly's Ham, Inc. sells hams during the major holiday seasons. During the current year 11,000 hams
were sold resulting in $220,000 of sales revenue, $55,000 of variable costs, and $24,000 of fixed costs.
14) Contribution margin per ham is:
A) $5.00
B) $15.00
C) $20.00
D) None of these answers are correct.
Answer: B
Explanation: B) ($220,000 - $55,000) / 11,000 hams = $15 per ham
Diff: 2
Terms: contribution margin per unit
Objective: 1
AACSB: Analytical skills
4
Copyright © 2012 Pearson Education, Inc.
