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Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank Chapter 5 Profit Planning and Decision-Making MULTIPLE CHOICE 1. Which of the following is considered a fixed cost? a. packing materials b. insurance c. direct labour d. sales commission ANS: B PTS: 1 REF: 211 2. Which of the following is considered a variable cost? a. finance costs b. professional fees c. depreciation d. overtime ANS: D PTS: 1 REF: 211 3. How is the contribution margin calculated? a. subtract fixed costs from revenue b. subtract cost of sales from revenue c. subtract variable costs from revenue d. subtract operating income from revenue ANS: C PTS: 1 REF: 216 4. How is the PV ratio calculated? a. divide the contribution margin by revenue b. divide revenue by the contribution margin c. multiply the contribution margin by the unit revenue d. multiply revenue by the unit contribution margin ANS: A PTS: 1 REF: 217 5. When is the break-even point reached? a. when revenue covers all fixed costs b. when revenue covers all costs c. when all costs are deducted from fixed and variable costs d. when revenue covers all variable costs ANS: B PTS: 1 REF: 216 6. What is the PV ratio divided into to calculate the revenue break-even point? a. fixed costs b. all operating costs c. revenue d. variable costs ANS: A PTS: 1 REF: 223 Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank 7. Which of the following is a non-cash expense? a. prepaid expenses b. electricity c. fixed costs d. depreciation ANS: D PTS: 1 REF: 223 8. What is the unit contribution margin divided into to calculate the profit break-even point? a. fixed costs b. profit plus fixed costs c. profit d. profit plus variable costs ANS: B PTS: 1 REF: 224 9. If a company wants to invest more money in its advertising budget, what is added to the additional advertising expense to calculate the new break-even point? a. existing fixed costs b. existing total costs c. existing variable costs d. existing profit objective ANS: A PTS: 1 REF: 225 10. What are committed fixed costs? a. costs that should be increased in order to generate more volume b. costs that should be eliminated if a company experiences a loss c. costs that can be changed with the volume of production d. costs that cannot be controlled ANS: D PTS: 1 REF: 233 11. On what is the break-even calculation based? a. profit before tax b. operating margin c. profit for the year before depreciation d. gross profit ANS: A PTS: 1 REF: 216|217 12. What is the tool that is used to analyze how volume, price, product mix, and product costs relate to one another? a. vertical analysis b. horizontal analysis c. cost of sales analysis d. cost-volume-profit analysis ANS: D PTS: 1 REF: 210 13. Which of the following would be considered a semi-variable cost? a. purchases b. freight in c. rent Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank d. electricity ANS: D PTS: 1 REF: 212 14. What are the variables used to calculate the break-even point? a. unit selling price, volume of production, and fixed costs b. revenue, fixed costs, and variable costs c. revenue, variable costs, and gross profit d. contribution margin, revenue, and variable costs ANS: B PTS: 1 REF: 223 15. What does the PV ratio mean? a. profit-value ratio b. performance-value ratio c. profit-volume ratio d. price-volume ratio ANS: C PTS: 1 REF: 217 16. What does the relevant range mean? a. all costs that apply to a certain level of production b. fixed costs that apply to a certain level of production c. revenue that applies to a certain level of production d. variable costs that apply to a certain level of production ANS: A PTS: 1 REF: 218 17. What are relevant costs? a. variable cost alternatives that managers can choose from to operate a business b. revenue alternatives that managers can choose from to operate a business c. all cost alternatives that managers can choose from to operate a business d. fixed cost alternatives that managers can choose from to operate a business ANS: C PTS: 1 REF: 218 18. What is the break-even point formula? a. SP x N = FC + VC x N b. FC + VC = SP - N c. N x FC = R d. SP x FC = N x VC ANS: A PTS: 1 REF: 222 19. When is the profit break-even point achieved? a. when the revenue covers variable costs and the profit objective b. when the revenue covers fixed costs and the profit objective c. when the contribution margin covers fixed costs and the profit objective d. when the contribution margin covers all costs and the profit objective ANS: C PTS: 1 REF: 224 20. What does the break-even wedge help managers determine the most appropriate way of structuring: a. revenue and variable costs Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank b. revenue and fixed costs c. the contribution margin to achieve higher profit d. all fixed and variable costs ANS: D PTS: 1 REF: 231 21. What decisions are helped through break-even point analysis? a. advertising effectiveness b. bookkeeping c. cost accounting d. pricing ANS: D PTS: 1 REF: 216 22. Within the framework of the break-even point analysis, profit decisions deal with what a company needs to do in order to achieve a certain level of: a. profit before taxes b. gross profit c. operating income d. contribution margin ANS: A PTS: 1 REF: 216| 217 23. What are costs that remain constant at varying levels of production called? a. semi-variable costs b. period costs c. out-of-pocket costs d. variable costs ANS: B PTS: 1 REF: 210 24. What are costs that fluctuate directly with changes in volume of production called? a. period costs b. constant costs c. out-of-pocket costs d. fixed costs ANS: C PTS: 1 REF: 211 25. What are costs that change disproportionately with changes in output levels called? a. fixed costs b. semi-variable costs c. variable costs d. output costs ANS: B PTS: 1 REF: 212 26. If a business could produce 1,000 units at a zero cost per unit with a total cost amounting to $100,000 that increases to 2,000 units with a zero cost per unit that also amounts to $100,000, what would the $100,000 be called? a. semi-variable cost b. committed cost c. fixed cost d. variable cost Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank ANS: C PTS: 1 REF: 210 27. If sales are at 2,000 units at a cost of $20,000 that increases to 4,000 units at a cost of $40,000 that finally reaches 6,000 units at a cost of $60,000, what would we be dealing with? a. committed costs b. variable costs c. semi-variable costs d. fixed costs ANS: B PTS: 1 REF: 211 28. If a company sells 10,000 units at a cost of $10.00 per unit that totals $200,000 in costs and 20,000 units at the same cost of $10.00 per unit that totals $300,000 in costs, what are we are referring to? a. total semi-variable costs b. total fixed costs c. total variable costs d. total costs ANS: D PTS: 1 REF: 220 29. What are inventory costs that include purchases, direct labour, and manufacturing overhead? a. non-product costs b. product costs c. standby costs d. period costs ANS: B PTS: 1 30. What are costs that are not related to inventory such as distribution costs and administrative expenses but are associated with fixed costs? a. calendar costs b. non-inventory costs c. accounting costs d. period costs ANS: D PTS: 1 REF: 210 31. Which of the following is a period cost? a. office salaries b. direct labour c. raw materials d. purchases ANS: A PTS: 1 REF: 210 32. Which of following is an out-of-pocket cost for a retail store? a. purchases b. advertising c. office salaries d. depreciation ANS: A PTS: 1 REF: 211 Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank 33. When does the break-even point take place on a break-even chart? a. when the revenue line intersects the total fixed cost line b. when the revenue line intersects the total cost line c. when the revenue line intersects the total variable cost line d. when the revenue line intersects the total semi-variable cost line ANS: B PTS: 1 REF: 220 34. What is the contribution margin divided into to calculate the revenue break-even point? a. sales revenue b. variable costs c. total costs d. fixed costs ANS: D PTS: 1 REF: 223 35. Given the following information, what is the contribution margin? Fixed costs $200 Sales revenue 1,000 Variable costs 750 a. b. c. d. $250 $1,950 $50 $800 ANS: A PTS: 1 REF: 216 36. What is the formula to calculate the PV ratio? a. revenue ÷ contribution margin b. revenue x contribution margin c. contribution margin ÷ revenue d. revenue - contribution margin ANS: C PTS: 1 REF: 217 37. Given the following information, what is the PV ratio? Contribution margin $250 Fixed costs 200 Operating profit 50 Revenue 1,000 Variable cost 750 a. b. c. d. 0.75 0.25 0.05 25 ANS: B PTS: 1 REF: 217 38. If a company decides to increase the unit selling price of its product, while keeping variable cost per unit, units sold, and fixed costs unchanged which of the following will occur? a. total variable costs will decrease Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank b. fixed costs will increase c. profit before tax will increase d. total variable costs will increase ANS: C PTS: 1 REF: 216 39. If a company sells more units strictly on the basis of “image” improvement and if variable costs per unit, selling price per unit, and fixed costs remain unchanged, which of the following will occur? a. profit for the year will remain the same b. revenue will increase c. variable costs will decrease d. fixed costs will increase ANS: B PTS: 1 REF: 21 40. If a company finds a way to decrease its fixed costs while its variable cost per unit, units sold, and selling price per unit remain unchanged, which of the following will occur? a. fixed costs will increase b. variable costs will increase c. profit before tax will increase d. revenue will decrease ANS: C PTS: 1 REF: 216 41. If a supplier has just informed a company about an increase in the cost per unit, while units sold, unit selling price, and fixed costs remain unchanged, which of the following will occur? a. profit before tax will decrease b. contribution margin will increase c. revenue will increase d. fixed costs will decrease ANS: A PTS: 1 REF: 216 42. What does the following formula calculate? Fixed costs --------------------------------------------Price per unit - variable costs per unit a. unit break-even point b. profit break-even point c. contribution margin ratio d. revenue break-even point ANS: A PTS: 1 43. What does the following formula calculate? Fixed costs ------------PV a. revenue break-even point b. profit break-even point c. contribution margin ratio REF: 223 Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank d. unit break-even point ANS: A PTS: 1 REF: 223 44. Given the following information, what is the revenue break-even point? Revenue $1,000 (1,000 units sold) Variable costs 750 Fixed costs 200 a. b. c. d. $ 1,000 $ 800 $ 250 $ 2,666 ANS: B PTS: 1 REF: 223 45. Given the following information, what is the unit break-even point? Revenue $2,000 (1,000 units sold) Variable costs 1,500 Fixed costs 400 a. b. c. d. 1,000 units 800 units 500 units 2,000 units ANS: B PTS: 1 REF: 223 46. If a company’s break-even point is 5,000 units and the president sets a profit objective, what will the company have to do in order to realize the objective? a. increase its fixed costs b. sell exactly 5,000 units c. sell more than 5,000 units d. sell less than 5,000 units ANS: C PTS: 1 REF: 224 47. If an entrepreneur is absolutely certain to sell 10,000 units in his new company and the break-even point is 3,000 units, what should the entrepreneur do? a. do not start the company because the risk is too high b. launch the company because the risk of not reaching the break-even point is high c. launch the company because there is little risk since the break-even point is well below expected sales d. do not start the company because according to the calculation, the break-even point will not be reached ANS: C PTS: 1 REF: 216 48. If product A has a contribution margin of $100 while product B has a contribution margin of $50, which of the following statements is true? a. changing the sales mix will not affect the profit level b. the company should concentrate on selling product B because it has a lower CM and will produce higher profit Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank c. the company should concentrate on selling product A because it has a lower CM and will produce higher profit d. the company should concentrate on selling product A because it has a higher CM and will produce higher profit ANS: D PTS: 1 REF: 216 49. What is the correct matching? Words A. fixed costs B. semi-variable costs C. variable costs Definitions 1. change disproportionately with changes in output level 2. fluctuate directly with changes in volume 3. remain constant at varying levels of production a. A-1, B-2, C-3 b. A-2, B-3, C-1 c. A-3, B-2, C-1 d. A-3, B-1, C-2 ANS: D PTS: 1 REF: 210-212 50. What is the correct matching if the per unit cost is $1.00? Units produced Cost A Cost B 0 1,000 2,000 3,000 4,000 5,000 a. b. c. d. $10,000 10,000 10,000 10,000 10,000 10,000 $0 1,000 2,000 3,000 4,000 5,000 cost A - variable; cost B - semi-variable; cost C – fixed cost A - fixed; cost B - variable; cost C - semi-variable cost A - variable; cost B - fixed; cost C - semi-variable cost A - fixed; cost B - semi-variable; cost C – variable ANS: B PTS: 1 REF: 210-212 51. Which of the following are variable costs? a. general expenses b. direct labour c. administrative expenses d. depreciation ANS: B PTS: 1 52. Which of the following are period costs? a. general expenses b. purchases c. contribution margin d. electricity REF: 211 Cost C $5,000 5,500 6,000 6,500 7,000 7,500 Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank ANS: D PTS: 1 REF: 210|211 53. Given the following information, what is the contribution margin? Revenue Direct material Direct labour Manufacturing overhead Administration overhead a. b. c. d. $1,000,000 500,000 250,000 150,000 50,000 $ 250,000 $ 750,000 $ 200,000 $ 50,000 ANS: A PTS: 1 REF: 216 54. What is the contribution margin? a. the difference between revenue and fixed costs b. the sum of revenue and variable costs c. the revenue minus variable and direct costs d. the difference between revenue and variable costs ANS: D PTS: 1 REF: 216 55. Given the following information, what is the PV ratio? Variable cost per unit Unit selling price per unit a. b. c. d. $100 $200 0.50% 2.0 $20,000 0.50 ANS: D PTS: 1 REF: 217 56. Given the following information, what is the unit break-even point? Selling price per unit $200 Variable cost per unit 100 Total fixed costs 100,000 a. b. c. d. 1,000 units 100,000 units 10,500 units 20,000 units ANS: A PTS: 1 REF: 223 57. Given the following information, what is the revenue break-even point? Selling price per unit $200 Variable cost per unit 100 Total fixed costs 100,000 Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank a. b. c. d. $ 500,000 $ 100,000 $ 250,000 $ 200,000 ANS: D PTS: 1 REF: 223 58. Given the following information, what is the profit break-even point? Selling price per unit $300 Variable cost per unit 100 Total fixed costs 100,000 Profit objective 10,000 a. b. c. d. 550 units 1,000 units 55 units 200 units ANS: A PTS: 1 REF: 224 59. If a company wants to make a $10,000 profit by selling 500 units, by how much should the selling price per unit be increased? Selling price per unit $300 Variable cost per unit 100 Total fixed costs 100,000 a. b. c. d. $ 5 $ 50 $ 33 $ 20 ANS: D PTS: 1 REF: 224 60. If a company wants to make a $10,000 profit, without changing the selling price, and by selling 500 units, by how much should fixed costs be reduced? Selling price per unit $300 Variable cost per unit 100 Total fixed costs 100,000 a. b. c. d. $ 5,000 $ 10,000 $ 30,000 $100,000 ANS: B PTS: 1 REF: 224 61. Given the following information, what should be the maximum fixed costs that the company should incur in order to break even? Revenue Cost of sales Product X Product Y $ 40,000 24,000 45% 50 Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank Product Z a. b. c. d. 35,000 60 $ 60,000 $ 55,000 $ 48,000 $ 58,000 ANS: C PTS: 1 REF: 224 62. Which of the following are fixed costs? a. freight in b. purchases c. salaries (selling) d. sales commission ANS: B PTS: 1 REF: 210-211 63. Which of the following are variable costs? a. office salaries b. property taxes c. purchases d. telephone ANS: C PTS: 1 REF: 211 64. By using the following information, if a company increases its selling price by 5% and increases its fixed costs by $100,000, how much more (or less) profit will the company realize? Revenue $2,500,000 Total variable costs 1,700,000 Total fixed costs 700,000 a. b. c. d. increase of $ 25,000 decrease of $ 25,000 decrease of $ 50,000 increase of $ 50,000 ANS: A PTS: 1 REF: 224 65. By using the following information, if a company increases its advertising budget by $30,000, how much more revenue will have to be realized in order to maintain the same profit level? Revenue $2,500,000 Total variable costs 1,700,000 Total fixed costs 700,000 a. b. c. d. $ 22,812 $ 14,443 $ 20,833 $ 93,750 ANS: D PTS: 1 REF: 224 66. If a company hires a new sales representative at an estimated cost of $60,000, what would be the company’s new revenue break-even point? Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank Revenue Total variable costs Total fixed costs a. b. c. d. $2,500,000 1,700,000 700,000 $ 2,375,000 $ 2,675,000 $ 2,575,000 $ 2,187,500 ANS: A PTS: 1 REF: 223 67. If a company reduces its variable costs by 5%, what would be the company’s new revenue break-even point? Revenue $ 2,500,000 Total variable costs 1,700,000 Total fixed costs 700,000 a. b. c. d. variable costs would be $1,615,000 and the PV ratio would be 0.32 PV ratio would be 0.354 and the break-even would be $ 1,977,401 contribution margin would be $855,000 and the break-even point would be $2,187,500 PV ratio would be 0.32 and the break-even would be $2,187,500 ANS: B PTS: 1 REF: 223 68. Given the following information, what is the company’s cash break-even point? Revenue $ 3,700,000 Total variable costs 2,300,000 Total fixed costs 1,100,000 including depreciation Depreciation 100,000 a. b. c. d. $ 1,642,553 $ 2,220,245 $ 2,642,857 $ 1,500,553 ANS: C PTS: 1 REF: 224 TRUE/FALSE 1. Break-even analysis is a straightforward and very powerful financial analytical technique than can help managers make a wide range of important decisions related to cash flows. ANS: F PTS: 1 2. Break-even analysis can help managers improve their decisions related to pricing and modernization. ANS: T PTS: 1 3. Pricing and automation decisions can be made more clearly with break-even analysis. ANS: T PTS: 1 Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank 4. Break-even analysis is an effective decision-making tool for market share analysis. ANS: F PTS: 1 5. Fixed costs remain constant at varying levels of production. ANS: T PTS: 1 6. Sales commissions are considered a fixed cost. ANS: F PTS: 1 7. Costs that fluctuate directly with changes in volume of production are called semi-variable. ANS: F PTS: 1 8. Cost of sales is considered a variable cost. ANS: T PTS: 1 9. Packing materials is considered is a semi-variable cost because this type of cost varies almost automatically with volume of production. ANS: F PTS: 1 10. Semi-variable costs change disproportionately with changes in output levels. ANS: T PTS: 1 11. Finance costs on a mortgage are considered fixed costs because they vary directly with sales volume. ANS: F PTS: 1 12. Depreciation expense is usually considered a fixed cost. ANS: T PTS: 1 13. The factors that affect profit levels are: market share, price/earnings ratio, fixed costs and variable costs. ANS: F PTS: 1 14. Changes in product mix can have an impact on the level of the break-even point. ANS: T PTS: 1 15. Break-even point takes place when revenue equals fixed costs. ANS: F PTS: 1 16. When total costs meet revenue, it is the point where break-even is achieved. Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank ANS: T PTS: 1 17. The contribution margin is the difference between revenue and variable costs. ANS: T PTS: 1 18. You can calculate the PV ratio by dividing the contribution margin by variable costs. ANS: F PTS: 1 19. The higher the PV ratio the better it is. ANS: T PTS: 1 20. Changes in variables costs can alter the PV ratio. ANS: T PTS: 1 21. The break-even point can be calculated by dividing the total costs by the unit contribution margin. ANS: F PTS: 1 22. Relevant range means costs (fixed and variable) that apply to a certain level of production. ANS: T PTS: 1 23. Relevant costs are costs alternatives that managers can choose from to operate their business. ANS: T PTS: 1 24. The break-even chart shows a graphic effect of change in both revenue and market share. ANS: F PTS: 1 25. Total cost line includes all variable and fixed costs. ANS: T PTS: 1 26. The break-even point can be calculated in two ways: dividing fixed costs by either the unit contribution margin or the PV ratio. ANS: T PTS: 1 27. The cash break-even point shows the number of units or revenue that can be reached in order to cover total cash variable costs less depreciation. ANS: F PTS: 1 28. To calculate the cash break-even point, one has to deduct depreciation from the variable costs. ANS: F PTS: 1 Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank 29. To calculate the cash break-even point, one should divide all fixed costs less depreciation by the PV ratio. ANS: T PTS: 1 30. To calculate the profit break-even point, one has to add the profit objective to the fixed costs and divide this number by the unit contribution margin. ANS: T PTS: 1 31. To calculate the profit break-even point, one has to add the profit objective to the total fixed costs and divide it by the PV ratio. ANS: T PTS: 1 32. Sensitivity analysis is a technique that shows to what extent a change in an investment decision impacts on the break-even point. ANS: F PTS: 1 33. Break-even analysis can be applied in any type of business as long as there is revenue and fixed costs. ANS: F PTS: 1 34. Break-even analysis can be applied to any types of businesses such as retail stores, service centres, movie theatres or manufacturing plants. ANS: T PTS: 1 35. To calculate the break-even point for a retail store, the unit contribution margin is more useful than the PV ratio. ANS: F PTS: 1 36. The break-even wedge method helps managers determine the most appropriate way to structure operating costs (fixed versus variable). ANS: T PTS: 1 37. Committed costs are considered variable costs and do not have to be incurred in order to operate a business. ANS: F PTS: 1 38. Operating managers can control discretionary fixed costs. ANS: T PTS: 1 39. Controllable costs are usually indirect costs that managers are not accountable for. ANS: F PTS: 1 Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank 40. Operating managers are accountable for both, controllable and direct costs. ANS: T PTS: 1 COMPLETION 1. _______________________________ analysis is a tool used for analyzing how volume, price, product mix, and product costs relate to one another. ANS: Cost-volume-profit PTS: 1 2. __________________ costs remain constant at varying levels of production. ANS: Fixed PTS: 1 3. Costs that fluctuate directly with changes in volume of production are referred to as _______________________ costs. ANS: variable PTS: 1 4. _________________________ costs change in a disproportionate way with output levels. ANS: Semi-variable PTS: 1 5. Rent and interest charges are considered _______________________ costs. ANS: fixed PTS: 1 6. The main factors that affect levels of profit are volume of production, ________________ , costs (fixed and variable) and changes in product mix. ANS: unit price PTS: 1 7. Break-even point is the level of production where revenue equals ___________________ costs. ANS: total PTS: 1 Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank 8. The contribution margin is calculated by finding the different between revenue and the __________________ costs. ANS: variable PTS: 1 9. The contribution margin is the level of profit that contributes for paying ________________ costs. ANS: fixed PTS: 1 10. The letters PV stands for ___________________________ ratio. ANS: profit-volume PTS: 1 11. To calculate the PV ratio, you need to divide the __________________________ margin by revenue. ANS: contribution PTS: 1 12. The __________________ range means that costs (fixed and variable) apply to a certain level of production. ANS: relevant PTS: 1 13. Changes in __________________ costs can alter the PV ratio. ANS: variable PTS: 1 14. To calculate the break-even point, you need to divide the fixed costs by the PV ratio or the unit __________________ margin. ANS: contribution PTS: 1 15. You can find the break-even point in units by dividing fixed costs by the ______________ contribution margin. ANS: unit PTS: 1 Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank 16. You can find the revenue break-even point by dividing fixed costs by the ___________________ ratio. ANS: PV PTS: 1 17. To calculate the cash break-even point, you need to deduct _____________________ from fixed costs so that this sum can be divided by the contribution margin. ANS: depreciation PTS: 1 18. The cash break-even point can be defined as the number of units or revenue that must be reached in order to cover total cash __________________ costs. ANS: fixed PTS: 1 19. To calculate the profit break-even point, you need to add the profit objective to the __________________ costs so that the sum can be divided by the unit contribution. ANS: fixed PTS: 1 20. __________________ analysis is a technique that shows to what extent a change in one variable (e.g., selling price, fixed costs) impacts on the break-even point. ANS: Sensitivity PTS: 1 21. The break-even __________________ is a method that helps determine the most appropriate way of structure operating costs (fixed versus variable). ANS: wedge PTS: 1 22. ____________________ fixed costs must be incurred in order to operate a business. ANS: Committed PTS: 1 23. _______________________ fixed costs are those that can be controlled by managers from one period to another if necessary. ANS: Discretionary Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank PTS: 1 24. Costs that operating managers are accountable for are ____________________ costs. ANS: controllable PTS: 1 25. ____________________ costs are necessary in the production cycle but that cannot be clearly allocated to specific products or services. ANS: Indirect PTS: 1 MATCHING Match the words with the term. a. electricity b. rent c. purchases d. tool e. margin 1. 2. 3. 4. 5. semi-variable cost variable cost fixed cost cost-volume-profit analysis contribution 1. 2. 3. 4. 5. ANS: ANS: ANS: ANS: ANS: A C B D E PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 Match the words with the term. a. break-even b. purchases c. amortization d. PV e. relevant range 6. 7. 8. 9. 10. applies to a certain level of production variable costs non-cash expense ratio revenue equals total costs 6. ANS: E PTS: 1 Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank 7. 8. 9. 10. ANS: ANS: ANS: ANS: B C D A PTS: PTS: PTS: PTS: 1 1 1 1 Match the words with the term. a. PV ratio b. gross profit c. total costs d. fixed costs e. variable costs 11. 12. 13. 14. 15. fixed and variable costs change with level of volume constant revenue less cost of sales contribution margin ÷ revenue 11. 12. 13. 14. 15. ANS: ANS: ANS: ANS: ANS: C E D B A PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 Match the words with the term. a. constant b. change c. disproportionate d. revenue e. total costs 16. 17. 18. 19. 20. semi-variable costs fixed costs variable costs fixed and variable costs units multiplied by selling price 16. 17. 18. 19. 20. ANS: ANS: ANS: ANS: ANS: C A B E D PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 Match the words with the term. a. freight b. property taxes c. telephone d. depreciation e. profit 21. semi-variable costs Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank 22. 23. 24. 25. difference between revenue and total costs variable costs fixed costs non-cash expense 21. 22. 23. 24. 25. ANS: ANS: ANS: ANS: ANS: C E A B D PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 Match the words with the term. a. depreciation b. variables c. PV ratio d. relevant range e. objective 26. 27. 28. 29. 30. sensitivity analysis revenue and contribution margin costs that apply to level of production cash break-even point profit break-even point 26. 27. 28. 29. 30. ANS: ANS: ANS: ANS: ANS: B C D A E PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 Match the words with the term. a. accountable b. purchases c. overhead d. must be incurred e. depreciation 31. 32. 33. 34. 35. non-cash cost committed costs controllable costs direct costs indirect costs 31. 32. 33. 34. 35. ANS: ANS: ANS: ANS: ANS: E D A B C PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 Match the words with the term. Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank a. b. c. d. e. committed change controllable non-cash cost indirect 36. 37. 38. 39. 40. must be incurred depreciation overhead costs variable costs managers are accountable for these costs 36. 37. 38. 39. 40. ANS: ANS: ANS: ANS: ANS: A D E B C PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 PROBLEM With the following information, answer the following questions! Total fixed costs allocated to the department are $25,000. Total number of units expected to be sold based on a market study are 12,000. Total variable costs are $24,000 and the unit selling price is $6.50 1. The break-even point in units is ___________________. ANS: The break-even point in units is 5,555. Unit selling price Unit variable costs Contribution margin $ 6.50 2.00 ($24,000 units ÷ 12,000) $ 4.50 Fixed costs Contribution margin $ 25,000 ÷ $ 4.50 PTS: 1 2. The break-even point in revenue is ___________________. ANS: The break-even point in revenue is $ 36,107.50. Number of units Unit selling price 5,555 x $ 6.50 PTS: 1 3. Should the project be accepted? ___________________ . Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank ANS: Yes. PTS: 1 4. Why? ________________________________________________ . ANS: Why? Because the break-even point is realized at 46.3% of the objective. Break-even point in revenue Revenue objective $ 36,107 ÷ $ 78,000 PTS: 1 5. If fixed costs were increased by $5,000 and variable costs and unit selling price remained unchanged, the PV ratio would be ___________________ . ANS: If fixed costs were increased by $5,000 and variable costs and unit selling price remained unchanged, the PV ratio would be .692 Revenue Variable costs Contribution margin Contribution margin Sales revenue $ 78,000 (12,000 x $ 6.50) 24,000 (12,000 x $ 2.00) $ 54,000 $ 54,000 ÷ $ 78,000 PTS: 1 6. If fixed costs were increased by $5,000 and variable costs and unit selling price remained unchanged, the new break even point in units would be ___________________ . ANS: If fixed costs were increased by $5,000 and variable costs and unit selling price remained unchanged, the new break-even point in units would be 6,667. New fixed costs Unit contribution $ 30,000 ÷ ($ 25,000 + $ 5,000) $ 4.50 PTS: 1 7. If fixed costs were increased by $5,000 and variable costs and unit selling price remained unchanged, the new break-even revenue would be ___________________ . ANS: If fixed costs were increased by $5,000 and variable costs and unit selling price remained unchanged, the new revenue break-even point would be $ 43,353. Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank New fixed costs $ 30,000 ÷ ($ 25,000 + $ 5,000) .692 Number of units Unit selling price 6,667 x $ 6.50 PTS: 1 With the following information, answer the following questions! A supplier approaches a company to sell a new product line. Based on the supplier's estimates, the company could sell as many as 2,500 units. The suggested retail price for each unit is $17.50. The purchase price for each unit is $8.00. The amount of fixed costs allocated to that particular department is $9,000. 8. The contribution margin is ___________________ . ANS: The contribution margin is $ 23,750. Revenue Variable costs Contribution margin $ 43,750 (2,500 x $ 17.50) 20,000 (2,500 x $ 8.00) $ 23,750 PTS: 1 9. The PV ratio is ___________________ . ANS: The PV ratio is .543 PTS: 1 10. The revenue break-even point is ___________________ . ANS: The revenue break-even point is $ 16,574. Fixed costs PV ratio $ 9,000 ÷ .543 PTS: 1 11. The profit realized is ___________________ . ANS: The profit realized is $ 14,750. Revenue Variable costs Contribution margin Fixed costs $ 43,750 (2,500 x $ 17.50) 20,000 (2,500 x $ 8.00) 23,750 9,000 Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank Profit $ 14,750 PTS: 1 With the following information, answer the following questions! Revenue for product A - $ 55,000 Revenue for product B - $ 25,000 Revenue for product C - $ 45,000 Cost of sales for the above product lines are 40%, 45%, and 50% of revenue respectively. Fixed costs are estimated at $40,000. The company would like to realize $ 25,000 in profit. 12. The total variable costs are ___________________ . ANS: The total variable costs are $ 55,750. Revenue Product A Product B Product C $ Total $ 125,000 Cost of sales 55,000 25,000 45,000 x x x 40% 45% 50% = = = $ 55,750 PTS: 1 13. The contribution margin is ___________________ . ANS: The contribution margin is $ 69,250. Revenue Cost of sales Contribution margin $ $ 125,000 55,750 69,250 PTS: 1 14. The PV ratio is ___________________ . ANS: The PV ratio is .554. Contribution margin Revenue $ 22,000 11,250 22,500 $ 69,250 ÷ $ 125,000 PTS: 1 15. The revenue break-even point is ___________________ . Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank ANS: The revenue break-even point is $ 72,202. Fixed costs PV ratio $ 40,000 ÷ .554 PTS: 1 16. Profit break-even point is ___________________ . ANS: Profit break-even point is $ 117,328. Fixed costs Profit objective Total PV ratio $ 40,000 25,000 $ 65,000 ÷ .554 PTS: 1 With the following information, answer the following questions. Advertising $ Depreciation Freight in Finance costs Leasing Office salaries 40,000 Office supplies 5,000 Purchases Salaries (selling) Sales commission. Revenue Travelling 20,000 50,000 17 ,000 18,000 9,000 250,000 65,000 26,000 550,000 7,000 17. The profit is ___________________. ANS: The profit is $ 43,000. Revenue Variable costs Freight-in Purchases Sales commission Total variable costs Contribution margin Fixed costs Advertising Depreciation Finance costs Leasing 550,000 ($ 17,000) (250,000) (26,000) (293,000) 257,000 ($ 20,000) (50,000) (18,000) (9,000) Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank Office salaries Office supplies Salaries (selling) Travelling Total fixed costs (40,000) (5,000) (65,000) (7,000) (214,000) Profit $ PTS: 1 18. PV ratio is ___________________. ANS: The PV ratio is .467. Contribution margin Revenue $ 257,000 ÷ 550,000 PTS: 1 19. The break-even point in revenue is ___________________ . ANS: The break-even point in revenue is $ 458,244. Fixed costs Contribution margin $ 214,000 .467 PTS: 1 20. Total variable costs are ___________________ . ANS: Total variable costs are $ 293,000 (see above for breakdown). PTS: 1 21. Total fixed costs are ___________________. ANS: Total fixed costs are $ 214,000 (see above for breakdown). PTS: 1 22. The cash break-even point is ___________________ . ANS: The cash break-even point is $ 351,178. Total fixed costs Depreciation $ 214,000 (50,000) 43,000 Full file at http://testbanksite.eu/Finance-for-Non-Financial-Managers-6th-Edition-Test-Bank Cash fixed costs PV ratio PTS: 1 $ 164,000 ÷ .467