Cost Volume Profit Questions

Cost-Volume-Profit Analysis

Self-Test Questions

1. The difference between the sales price and the total variable costs is the contribution margin. (D)

2. The breakeven volume in units (perfume sticks) for 2005 is

TR-VC-FC=PBT MR=900000/1800 = 500

TR-VC-FC=0 VC/Q = 495000/1800 = 275

Q*MR - Q(VC/Q) = FC

Q = _____FC_____

MR-VC/Q

Q = 247500/(500 - 275)

Q=1100 Therefore (B)

3. If sales volume is expected to be 2100 units with prices/costs same, after-tax net income is expected to be

TR-VC-FC=PBT

Q*MR-Q(VC/Q)-FC=PBT

2100(500) - 2100(275) - 247500 = PBT = 225000

After income taxes of 32%:

225000 - (225000)(.32) = 153000 Therefore (A)

4. Sell 1500 at 450, reject some business from regular customers.

TR-VC-FC=PBT

Q*MR-Q(VC/Q)-FC=PBT

1500(450)+1500(500) - 3000(275) - 247500 = 352500

After income taxes

352500 - 352500(.32) = 239700 Therefore (C)

5. Prices decline by 10%, variable costs increase $40/unit, no change in FC. Q needed to earn after-tax net income of 107100.

After tax income of 107100 requires PBT = X, where

X - (0.32)X = 107100 VC/Q = 315

X = 157500 MR = 450

TR-VC-FC=157500

Q(450) - Q(315) - 247500 = 157500

Q(135) = 405000

Q = 3000

Sales volume required is 3000(450)=1,350,000 Therefore (D)

6. Degree of operating leverage = contribution