US CMA Part 2 · Chapter 5
Business decision analysis: cost/volume/profit analysis MCQs with Answers
15 multiple-choice questions on Business decision analysis: cost/volume/profit analysis for US CMA Part 2 Strategic Financial Management. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Marlow Fitness sells a product for $60 per unit. Variable cost is $36 per unit and annual fixed costs are $312,000. What is the breakeven point in units?
- A) 3,250 units
- B) 8,667 units
- C) 13,000 units
- D) 5,200 units
Show answer & explanation
Answer: C) 13,000 units
Breakeven units = fixed costs / contribution margin per unit = $312,000 / ($60 - $36) = $312,000 / $24 = 13,000 units. Dividing by the selling price (5,200) ignores variable costs.
Question 2
Newbury Bakery has a contribution margin ratio of 40% and annual fixed costs of $480,000. What is its breakeven point in sales dollars?
- A) $800,000
- B) $1,200,000
- C) $192,000
- D) $672,000
Show answer & explanation
Answer: B) $1,200,000
Breakeven sales dollars = fixed costs / contribution margin ratio = $480,000 / 40% = $1,200,000. Dividing by the variable cost ratio (60%) gives $800,000, which is incorrect.
Question 3
Oakham Audio sells speakers at $85 each with variable costs of $51 per unit. Fixed costs are $408,000 per year. How many units must be sold to earn a pre-tax profit of $136,000?
- A) 12,000 units
- B) 8,000 units
- C) 6,400 units
- D) 16,000 units
Show answer & explanation
Answer: D) 16,000 units
Required units = (fixed costs + target profit) / CM per unit = ($408,000 + $136,000) / ($85 - $51) = $544,000 / $34 = 16,000 units. 12,000 units is only the breakeven point.
Question 4
Pryor Cycles wants to earn after-tax net income of $90,000. Its tax rate is 25%, selling price is $50 per unit, variable cost is $30 per unit and fixed costs are $260,000. How many units must it sell?
- A) 17,500 units
- B) 18,625 units
- C) 19,000 units
- D) 21,833 units
Show answer & explanation
Answer: C) 19,000 units
Convert the after-tax target to pre-tax: $90,000 / (1 - 25%) = $120,000. Required units = ($260,000 + $120,000) / ($50 - $30) = $380,000 / $20 = 19,000 units. Grossing up by multiplying by 1.25 ($112,500) understates the pre-tax profit needed, and ignoring tax gives 17,500 units.
Question 5
Quarry Stone Co. has budgeted sales of $900,000 and breakeven sales of $720,000. What is its margin of safety in dollars and as a percentage of budgeted sales?
- A) $720,000; 80%
- B) $180,000; 20%
- C) $180,000; 25%
- D) $180,000; 80%
Show answer & explanation
Answer: B) $180,000; 20%
Margin of safety = budgeted sales - breakeven sales = $900,000 - $720,000 = $180,000. As a percentage of budgeted sales: $180,000 / $900,000 = 20%. Sales could fall by this amount before the company incurs a loss.
Question 6
Redwood Garden sells two products in a constant sales mix of 3 units of X for every 2 units of Y. X has a contribution margin of $20 per unit and Y has $35 per unit. Fixed costs are $520,000. How many units of X must be sold to break even?
- A) 8,000 units
- B) 12,000 units
- C) 11,345 units
- D) 4,000 units
Show answer & explanation
Answer: B) 12,000 units
CM per sales-mix batch (3X + 2Y) = (3 x $20) + (2 x $35) = $60 + $70 = $130. Breakeven batches = $520,000 / $130 = 4,000. Units of X = 4,000 x 3 = 12,000; units of Y = 4,000 x 2 = 8,000. A simple average CM of $27.50 ignores the sales mix.
Question 7
A company sells two products. Product L has a contribution margin ratio of 25% and Product H has a contribution margin ratio of 45%. Total sales dollars and fixed costs are unchanged, but the sales mix shifts toward Product L. What happens to the company's breakeven point in sales dollars?
- A) It decreases, because the weighted average contribution margin ratio rises
- B) It is unchanged, because fixed costs are unchanged
- C) It decreases, because Product L generates more sales dollars
- D) It increases, because the weighted average contribution margin ratio falls
Show answer & explanation
Answer: D) It increases, because the weighted average contribution margin ratio falls
Breakeven sales dollars = fixed costs / weighted average CM ratio. A shift toward the lower-margin product reduces the weighted average CM ratio, so more sales dollars are required to cover the same fixed costs and operating income falls at any given sales level.
Question 8
Stanton Toys sells a toy at $40 with a variable cost of $25 and fixed costs of $300,000. If the variable cost rises to $28 per unit, by how many units will the breakeven point increase?
- A) 2,400 units
- B) 5,000 units
- C) 20,000 units
- D) 25,000 units
Show answer & explanation
Answer: B) 5,000 units
Original breakeven = $300,000 / ($40 - $25) = $300,000 / $15 = 20,000 units. New breakeven = $300,000 / ($40 - $28) = $300,000 / $12 = 25,000 units. Increase = 5,000 units. The 20% fall in unit contribution margin raises breakeven by 25%, not by the 12% rise in variable cost.
Question 9
Which of the following is a standard assumption of cost/volume/profit analysis?
- A) Selling price per unit and variable cost per unit are constant within the relevant range
- B) Inventory levels change significantly during the period
- C) Fixed costs increase in proportion to sales volume
- D) The sales mix changes as total volume changes
Show answer & explanation
Answer: A) Selling price per unit and variable cost per unit are constant within the relevant range
CVP analysis assumes linear revenue and cost functions within the relevant range: constant unit selling price, constant unit variable cost and constant total fixed costs. It also assumes production equals sales (no significant inventory change) and, for multiple products, a constant sales mix.
Question 10
Thatcher Optics has a margin of safety ratio of 25%. What is its degree of operating leverage at the current sales level?
- A) 4.0
- B) 3.0
- C) 0.5
- D) 1.33
Show answer & explanation
Answer: A) 4.0
Degree of operating leverage = 1 / margin of safety ratio = 1 / 0.25 = 4.0. This holds because DOL = CM / operating income and operating income = margin of safety in sales x CM ratio. A 10% increase in sales would therefore raise operating income by about 40%.
Question 11
Upland Pumps sells 14,000 units at $120 each. Variable cost is $70 per unit and fixed costs are $540,000. What is operating income?
- A) $160,000
- B) $700,000
- C) $1,140,000
- D) $430,000
Show answer & explanation
Answer: A) $160,000
Contribution margin = ($120 - $70) x 14,000 = $50 x 14,000 = $700,000. Operating income = $700,000 - $540,000 = $160,000.
Question 12
Vickers Labs can produce a product with either of two processes. Process A has fixed costs of $200,000 and variable cost of $18 per unit. Process B, which is more automated, has fixed costs of $320,000 and variable cost of $12 per unit. At what volume are total costs equal, and which process is cheaper above that volume?
- A) 20,000 units; Process A is cheaper above that volume
- B) 17,333 units; Process B is cheaper above that volume
- C) 15,556 units; Process A is cheaper above that volume
- D) 20,000 units; Process B is cheaper above that volume
Show answer & explanation
Answer: D) 20,000 units; Process B is cheaper above that volume
Set total costs equal: $200,000 + 18Q = $320,000 + 12Q, so 6Q = $120,000 and Q = 20,000 units. Above this volume the lower variable cost of Process B outweighs its higher fixed cost; for example at 30,000 units, A costs $740,000 and B costs $680,000.
Question 13
In a contribution margin income statement, what is the contribution margin?
- A) Gross profit minus fixed selling and administrative costs
- B) Sales revenue minus all variable costs, including variable selling and administrative costs
- C) Sales revenue minus cost of goods sold
- D) Sales revenue minus all fixed costs
Show answer & explanation
Answer: B) Sales revenue minus all variable costs, including variable selling and administrative costs
The contribution format classifies costs by behavior. Contribution margin = sales - all variable costs (manufacturing and non-manufacturing). It is the amount available to cover fixed costs and then provide profit. Sales minus cost of goods sold is gross profit, which belongs to the absorption (functional) format.
Question 14
Walden Ceramics expects to sell 25,000 units next year. Variable cost is $22 per unit and fixed costs are $450,000. What is the minimum selling price per unit required to break even?
- A) $18.00
- B) $31.00
- C) $25.96
- D) $40.00
Show answer & explanation
Answer: D) $40.00
At breakeven, total revenue = total cost: 25,000 x P = $450,000 + (25,000 x $22). P = $22 + $450,000 / 25,000 = $22 + $18.00 = $40.00. Each unit must cover its variable cost and its share of fixed costs.
Question 15
Yates Lighting sells lamps at $50 each with a variable cost of $30. Fixed costs are $210,000. How many lamps must be sold to earn a pre-tax profit equal to 15% of sales revenue?
- A) 7,636 units
- B) 12,075 units
- C) 16,800 units
- D) 10,500 units
Show answer & explanation
Answer: C) 16,800 units
Profit required per unit = 15% x $50 = $7.50. Set 50Q - 30Q - $210,000 = 7.5Q, so (20 - 7.5)Q = $210,000 and Q = $210,000 / $12.50 = 16,800 units. Check: revenue $840,000, profit = $126,000 = 15% of sales.