Test bank managerial accounting by garrison 13e chapter 06

Chapter 6 Cost-Volume-Profit Relationships
True/False Questions
1. One way to compute the total contribution margin is to add total fixed expenses to net
operating income.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
2. On a CVP graph for a profitable company, the total revenue line will be steeper than
the total cost line.
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 2

AICPA BB: Critical Thinking
Level: Easy

3. In two companies making the same product and with the same total sales and total
expenses, the contribution margin ratio will be lower in the company with a higher
proportion of fixed expenses in its cost structure.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 3

AICPA BB: Critical Thinking
Level: Medium

4. If the variable expense per unit increases, and all other factors remain constant, the
contribution margin ratio will increase.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 3

AICPA BB: Critical Thinking
Level: Medium

5. The impact on net operating income of any given dollar change in total sales can be
estimated by multiplying the CM ratio by the dollar change in total sales.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
6. A company with sales of $70,000 and variable expenses of $40,000 should spend
$10,000 on increased advertising if the increased advertising will increase sales by
$20,000.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 4

AICPA BB: Critical Thinking
Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

6-7


Chapter 6 Cost-Volume-Profit Relationships
7. The formula for the break-even point is the same as the formula to attain a given target
profit for the special case where the target profit is zero.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5; 6 Level: Medium
8. An increase in total fixed expenses will not affect the break-even point so long as the
contribution margin ratio remains unchanged.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 5

AICPA BB: Critical Thinking
Level: Medium

9. All other things the same, a reduction in the variable expense per unit will cause the
break-even point to rise.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 5

AICPA BB: Critical Thinking
Level: Medium

10. The unit sales volume necessary to reach a target profit is determined by dividing the
target profit by the contribution margin per unit.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 6 Level: Medium
11. All other things the same, the margin of safety in dollars at a given level of sales will
tend to be lower for a capital-intensive company than for a labor-intensive company
with high variable expenses.
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 7

AICPA BB: Critical Thinking
Level: Medium

12. The margin of safety in dollars equals the excess of budgeted (or actual) sales over the
break-even volume of sales.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Easy
13. A company with high operating leverage will experience a lower reduction in net
operating income in a period of declining sales than will a company with low
operating leverage.
Ans: False AACSB: Analytic

AICPA FN: Reporting LO: 8

6-8

AICPA BB: Critical Thinking
Level: Medium

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 6 Cost-Volume-Profit Relationships
14. If Q is the quantity of a product sold, P is the price per unit, V is the variable expense
per unit, and F is the total fixed expense, then the degree of operating leverage is equal
to: [Q(P-V)] ÷ [Q(P-V)-F]
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 8

AICPA BB: Critical Thinking
Level: Hard

15. A shift in the sales mix from products with high contribution margin ratios toward
products with low contribution margin ratios will raise the break-even point.
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 9

AICPA BB: Critical Thinking
Level: Medium

Multiple Choice Questions
16. Contribution margin can be defined as:

A) the amount of sales revenue necessary to cover variable expenses.
B) sales revenue minus fixed expenses.
C) the amount of sales revenue necessary to cover fixed and variable expenses.
D) sales revenue minus variable expenses.
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
17. Which of the following statements is correct with regard to a CVP graph?
A) A CVP graph shows the maximum possible profit.
B) A CVP graph shows the break-even point as the intersection of the total sales
revenue line and the total expense line.
C) A CVP graph assumes that total expense varies in direct proportion to unit sales.
D) A CVP graph shows the operating leverage as the gap between total sales
revenue and total expense at the actual level of sales.
Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

6-9


Chapter 6 Cost-Volume-Profit Relationships
18. If both the fixed and variable expenses associated with a product decrease, what will
be the effect on the contribution margin ratio and the break-even point, respectively?
A)
B)
C)
D)

Contribution margin ratio Break-even point

Decrease
Increase
Increase
Decrease
Decrease
Decrease
Increase
Increase

Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3; 5 Level: Medium Source: CMA; adapted
19. Which of the following is true regarding the contribution margin ratio of a single
product company?
A) As fixed expenses decrease, the contribution margin ratio increases.
B) The contribution margin ratio multiplied by the selling price per unit equals the
contribution margin per unit.
C) The contribution margin ratio will decline as unit sales decline.
D) The contribution margin ratio equals the selling price per unit less the variable
expense ratio.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
20. If a company is operating at the break-even point:
A) its contribution margin will be equal to its variable expenses.
B) its margin of safety will be equal to zero.
C) its fixed expenses will be equal to its variable expenses.
D) its selling price will be equal to its variable expense per unit.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5; 7 Level: Medium
21. At the break-even point:
A) sales would be equal to contribution margin.

B) contribution margin would be equal to fixed expenses.
C) contribution margin would be equal to net operating income.
D) sales would be equal to fixed expenses.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Medium

6-10

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 6 Cost-Volume-Profit Relationships
22. The break-even point would be increased by:
A) a decrease in total fixed expenses.
B) a decrease in the ratio of variable expenses to sales.
C) an increase in the contribution margin ratio.
D) none of these.
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Medium
23. Which of the following strategies could be used to reduce the break-even point?
A)
B)
C)
D)

Fixed expenses Contribution margin
Increase
Increase
Decrease
Decrease

Decrease
Increase
Increase
Decrease

Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Easy
24. Break-even analysis assumes that:
A) Total revenue is constant.
B) Unit variable expense is constant.
C) Unit fixed expense is constant.
D) Selling prices must fall in order to generate more revenue.
Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Easy
25. Target profit analysis is used to answer which of the following questions?
A) What sales volume is needed to cover all expenses?
B) What sales volume is needed to cover fixed expenses?
C) What sales volume is needed to earn a specific amount of net operating income?
D) What sales volume is needed to avoid a loss?
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 6 Level: Easy

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Chapter 6 Cost-Volume-Profit Relationships
26. The margin of safety can be calculated by:
A) Sales − (Fixed expenses/Contribution margin ratio).

B) Sales − (Fixed expenses/Variable expense per unit).
C) Sales − (Fixed expenses + Variable expenses).
D) Sales − Net operating income.
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Medium
27. If the degree of operating leverage is 4, then a one percent change in quantity sold
should result in a four percent change in:
A) unit contribution margin.
B) revenue.
C) variable expense.
D) net operating income.
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 8 Level: Easy Source: CMA; adapted
28. Which of the following is the correct calculation for the degree of operating leverage?
A) net operating income divided by total expenses.
B) net operating income divided by total contribution margin.
C) total contribution margin divided by net operating income.
D) variable expense divided by total contribution margin.
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 8 Level: Easy
29. Which of the following is an assumption underlying standard CVP analysis?
A) In multiproduct companies, the sales mix is constant.
B) In manufacturing companies, inventories always change.
C) The price of a product or service is expected to change as volume changes.
D) Fixed expenses will change as volume increases.
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 9 Level: Easy

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 6 Cost-Volume-Profit Relationships
30. Hopi Corporation expects the following operating results for next year:
Sales...........................................................
Margin of safety.........................................
Contribution margin ratio...........................
Degree of operating leverage.....................

$400,000
$100,000
75%
4

What is Hopi expecting total fixed expenses to be next year?
A) $75,000
B) $100,000
C) $200,000
D) $225,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1; 3; 8 Level: Hard
Solution:
Current sales - Breakeven sales = Margin of safety
Substituting the given information into the above equation, we will have:
$400,000 − Breakeven sales = $100,000
Breakeven sales = $300,000
Breakeven sales = Fixed expenses ÷ Contribution margin ratio
Substituting the given information into the above equation, we will have:
$300,000 = Fixed expenses ÷ 0.75

Fixed expenses = $225,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

6-13


Chapter 6 Cost-Volume-Profit Relationships
31. Escareno Corporation has provided its contribution format income statement for June.
The company produces and sells a single product.
Sales (8,400 units).......................... $764,400
Variable expenses........................... 445,200
Contribution margin....................... 319,200
Fixed expenses............................... 250,900
Net operating income..................... $ 68,300
If the company sells 8,200 units, its total contribution margin should be closest to:
A) $301,000
B) $311,600
C) $319,200
D) $66,674
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Current contribution margin ÷ Current sales in units = Contribution margin per unit
$319,200 ÷ 8,400 = $38 contribution margin per unit
If 8,200 units are sold, the total contribution margin will be 8,200 × $38, or $311,600.
32. Rovinsky Corporation, a company that produces and sells a single product, has
provided its contribution format income statement for November.
Sales (5,700 units).............. $319,200
Variable expenses............... 188,100

Contribution margin........... 131,100
Fixed expenses................... 106,500
Net operating income......... $ 24,600
If the company sells 5,300 units, its net operating income should be closest to:
A) $24,600
B) $2,200
C) $22,874
D) $15,400
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 6 Cost-Volume-Profit Relationships
Solution:
Current sales dollars ÷ Current sales in units = Sales price per unit
$319,200 ÷ 5,700 = $56 sales price per unit
Current variable expenses ÷ Current sales in units = Variable expense per unit
$188,100 ÷ 5,700 = $33 variable expense per unit
Sales (5,300 units × $56).......................
Variable expenses (5,300 units × $33)...
Contribution margin..............................
Fixed expenses.......................................
Net operating income............................

$296,800
174,900

121,900
106,500
$ 15,400

33. Sorin Inc., a company that produces and sells a single product, has provided its
contribution format income statement for January.
Sales (4,200 units).......................... $155,400
Variable expenses........................... 100,800
Contribution margin.......................
54,600
Fixed expenses...............................
42,400
Net operating income..................... $ 12,200
If the company sells 4,600 units, its total contribution margin should be closest to:
A) $54,600
B) $59,800
C) $69,400
D) $13,362
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Current contribution margin ÷ Current sales in units = Contribution margin per unit
$54,600 ÷ 4,200 = $13 contribution margin per unit
If 4,600 units are sold, the total contribution margin will be 4,600 × $13, or $59,800.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

6-15

Chapter 6 Cost-Volume-Profit Relationships
34. Decaprio Inc. produces and sells a single product. The company has provided its
contribution format income statement for June.
Sales (8,800 units)..........................
Variable expenses...........................
Contribution margin.......................
Fixed expenses...............................
Net operating income.....................

$528,000
290,400
237,600
211,700
$ 25,900

If the company sells 9,200 units, its net operating income should be closest to:
A) $27,077
B) $49,900
C) $36,700
D) $25,900
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Current sales dollars ÷ Current sales in units = Sales price per unit
$528,000 ÷ 8,800 = $60 sales price per unit
Current variable expenses ÷ Current sales in units = Variable expense per unit
$290,400 ÷ 8,800 = $33 variable expense per unit
Sales (9,200 units × $60 )..........................
Variable expenses (9,200 units × $33).......
Contribution margin...................................

Fixed expenses...........................................
Net operating income.................................

6-16

$552,000
303,600
248,400
211,700
$ 36,700

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 6 Cost-Volume-Profit Relationships
35. The Bronco Birdfeed Company reported the following information:
Sales (400 cases)............................ $100,000
Variable expenses...........................
60,000
Contribution margin.......................
40,000
Fixed expenses...............................
35,000
Net operating income.....................
$5,000
How much will the sale of one additional case add to Bronco's net operating income?
A) $250.00
B) $100.00
C) $150.00
D) $12.50

Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Current contribution margin ÷ Current sales in cases = Contribution margin per case
$40,000 ÷ 400 = $100 contribution margin per case
If one additional case is sold, net operating income will increase by $100.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

6-17


Chapter 6 Cost-Volume-Profit Relationships
36. The margin of safety in the Flaherty Company is $24,000. If the company's sales are
$120,000 and its variable expenses are $80,000, its fixed expenses must be:
A) $8,000
B) $32,000
C) $24,000
D) $16,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3; 5; 7 Level: Hard
Solution:
Current sales - Breakeven sales = Margin of safety
Substituting the given information into the above equation, we will have:
$120,000 - Breakeven sales = $24,000
Breakeven sales = $96,000
Sales - Variable expenses = Contribution margin
$120,000 - $80,000 = $40,000
Contribution margin ratio = Contribution margin ÷ Sales
Contribution margin ratio = $ 40,000 ÷ $120,000

Contribution margin ratio = 0.33333
Breakeven sales = Fixed costs ÷ Contribution margin ratio
Substituting the given information into the above equation, we will have:
$96,000 = Fixed costs ÷ 0.33333
Fixed costs = $32,000

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 6 Cost-Volume-Profit Relationships
37. Dodero Company produces a single product which sells for $100 per unit. Fixed
expenses total $12,000 per month, and variable expenses are $60 per unit. The
company's sales average 500 units per month. Which of the following statements is
correct?
A) The company's break-even point is $12,000 per month.
B) The fixed expenses remain constant at $24 per unit for any activity level within
the relevant range.
C) The company's contribution margin ratio is 40%.
D) Responses A, B, and C are all correct.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3; 5 Level: Medium
Solution:
Answer A is not correct because:
Sales = Variable expenses + Fixed expenses + Profit
$100Q = $60Q + $12,000 + $0
$40Q = $12,000
Q = $12,000 ÷ $40 per unit = 300 units
300 units × $100 selling price per unit = $30,000 breakeven sales in dollars

Answer B is not correct because fixed costs change as activity level changes
Answer C is correct because:
Contribution margin per unit = Selling price per unit - Variable expenses per unit
= $100 - $60 = $40
Contribution margin ratio = Contribution margin per unit ÷ Selling price per unit
Contribution margin ratio = $40 ÷ $100
Contribution margin ratio = 40%

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

6-19


Chapter 6 Cost-Volume-Profit Relationships
38. Holt Company's variable expenses are 70% of sales. At a $300,000 sales level, the
degree of operating leverage is 10. If sales increase by $60,000, the degree of
operating leverage will be:
A) 12
B) 10
C) 6
D) 4
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3; 8 Level: Hard
Solution:
Sales..........................................................
Variable expenses ($300,000 × 70%).......
Contribution margin.................................
Fixed expenses..........................................
Net operating income...............................

$300,000
210,000
90,000
?
$
?

Current degree of operating leverage = Current contribution margin ÷ Current net
operating income
10 = $90,000 ÷ Current net operating income
Current net operating income = $90,000 ÷ 10 = $9,000
Contribution margin = Fixed expenses - Net operating income
$90,000 = Fixed expenses - $9,000
Fixed expenses = $90,000 - $9,000 = $81,000
Sales ($300,000 + $60,000)......................
Variable expenses ($360,000 × 70%).......
Contribution margin.................................
Fixed expenses..........................................
Net operating income...............................

$360,000
252,000
108,000
81,000
$ 27,000

Degree of operating leverage = Contribution margin ÷ Net operating income
= $108,000/$27,000 = 4.0

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 6 Cost-Volume-Profit Relationships
39. Gayne Corporation's contribution margin ratio is 12% and its fixed monthly expenses
are $84,000. If the company's sales for a month are $738,000, what is the best estimate
of the company's net operating income? Assume that the fixed monthly expenses do
not change.
A) $565,440
B) $654,000
C) $88,560
D) $4,560
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Sales..........................................................
Variable expenses ($738,000 × 88%).......
Contribution margin ($738,000 × 12%)...
Fixed expenses..........................................
Net operating income...............................

$738,000
649,440
88,560
84,000
$ 4,560

40. Jilk Inc.'s contribution margin ratio is 58% and its fixed monthly expenses are
$36,000. Assuming that the fixed monthly expenses do not change, what is the best

estimate of the company's net operating income in a month when sales are $103,000?
A) $23,740
B) $59,740
C) $67,000
D) $7,260
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Sales........................................................... $103,000
Variable expenses ($103,000 × 42%)........
43,260
Contribution margin ($103,000 × 58%)....
59,740
Fixed expenses...........................................
36,000
Net operating income................................. $ 23,740

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Chapter 6 Cost-Volume-Profit Relationships
41. Creswell Corporation's fixed monthly expenses are $29,000 and its contribution
margin ratio is 56%. Assuming that the fixed monthly expenses do not change, what is
the best estimate of the company's net operating income in a month when sales are
$95,000?
A) $12,800
B) $24,200
C) $53,200

D) $66,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Sales...........................................................
Variable expenses ($95,000 × 44%)...........
Contribution margin ($95,000 × 56%).......
Fixed expenses...........................................
Net operating income.................................

$95,000
41,800
53,200
29,000
$24,200

42. Wilson Company prepared the following preliminary budget assuming no advertising
expenditures:
Selling price.......................
Unit sales............................
Variable expenses...............
Fixed expenses...................

$10 per unit
100,000
$600,000
$300,000

Based on a market study, the company estimated that it could increase the unit selling
price by 15% and increase the unit sales volume by 10% if $100,000 were spent on

advertising. Assuming that these changes are incorporated in its budget, what should
be the budgeted net operating income?
A) $175,000
B) $190,000
C) $205,000
D) $365,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Medium Source: CPA; adapted

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 6 Cost-Volume-Profit Relationships
Solution:
Sales (110,000 units × $11.50).....................
Variable expenses (110,000 units × $6*)......
Contribution margin......................................
Fixed expenses ($300,000 + $100,000)........
Net operating income....................................

$1,265,000
660,000
605,000
400,000
$ 205,000

* Current variable expenses ÷ Current sales in units = Variable expense per unit
$600,000 ÷ 100,000 = $6 variable expense per unit

43. Data concerning Kardas Corporation's single product appear below:
Selling price.......................
Variable expenses...............
Contribution margin...........

Per Unit
$140
28
$112

Percent of Sales
100%
20%
80%

The company is currently selling 8,000 units per month. Fixed expenses are $719,000
per month. The marketing manager believes that a $20,000 increase in the monthly
advertising budget would result in a 180 unit increase in monthly sales. What should
be the overall effect on the company's monthly net operating income of this change?
A) decrease of $160
B) increase of $20,160
C) decrease of $20,000
D) increase of $160
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Sales (8,000 units, 8,180 units × $140)..........
Variable expenses
($1,120,000, $1,145,200 × 20%)................
Contribution margin.......................................

Fixed expenses................................................
Net operating income.....................................

8,000 units
$1,120,000

8,180 units
$1,145,200

224,000
896,000
719,000
$ 177,000

229,040
916,160
739,000
$ 177,160

Increase in net operating income: $177,160 - $177,000 = $160

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Chapter 6 Cost-Volume-Profit Relationships
44. Kuzio Corporation produces and sells a single product. Data concerning that product
appear below:
Per Unit Percent of Sales

Selling price.......................
$130
100%
Variable expenses...............
78
60%
Contribution margin...........
$ 52
40%
The company is currently selling 6,000 units per month. Fixed expenses are $263,000
per month. The marketing manager believes that a $5,000 increase in the monthly
advertising budget would result in a 140 unit increase in monthly sales. What should
be the overall effect on the company's monthly net operating income of this change?
A) increase of $2,280
B) increase of $7,280
C) decrease of $5,000
D) decrease of $2,280
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Sales (6,000 units, 6,140 units × $130).........
Variable expenses
($780,000, $798,200 × 60%).....................
Contribution margin......................................
Fixed expenses..............................................
Net operating income....................................

6,000 units
$780,000

6,140 units
$798,200

468,000
312,000
263,000
$ 49,000

478,920
319,280
268,000
$ 51,280

Increase in net operating income: $51,280 - $49,000 = $2,280

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 6 Cost-Volume-Profit Relationships
45. Data concerning Dorazio Corporation's single product appear below:
Selling price...................................
Variable expenses...........................
Contribution margin.......................

Per Unit
$160
48
$112

Percent of Sales
100%
30%
70%

Fixed expenses are $87,000 per month. The company is currently selling 1,000 units
per month. Management is considering using a new component that would increase
the unit variable cost by $28. Since the new component would increase the features of
the company's product, the marketing manager predicts that monthly sales would
increase by 400 units. What should be the overall effect on the company's monthly net
operating income of this change?
A) increase of $5,600
B) increase of $33,600
C) decrease of $5,600
D) decrease of $33,600
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Sales (1,000 units, 1,400 units × $160)..............
Variable expenses
(1,000 units × $48, 1,400 units × $76)............
Contribution margin............................................
Fixed expenses....................................................
Net operating income..........................................

1,000 units
$160,000

1,400 units

$224,000

48,000
112,000
87,000
$ 25,000

106,400
117,600
87,000
$ 30,600

Increase in net operating income: $30,600 - $25,000 = $5,600

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Chapter 6 Cost-Volume-Profit Relationships
46. Chovanec Corporation produces and sells a single product. Data concerning that
product appear below:
Per Unit
Selling price.......................
$170
Variable expenses...............
68
Contribution margin...........
$102

Percent of Sales
100%
40%
60%

Fixed expenses are $521,000 per month. The company is currently selling 7,000 units
per month. Management is considering using a new component that would increase
the unit variable cost by $6. Since the new component would increase the features of
the company's product, the marketing manager predicts that monthly sales would
increase by 500 units. What should be the overall effect on the company's monthly net
operating income of this change?
A) decrease of $48,000
B) decrease of $6,000
C) increase of $48,000
D) increase of $6,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Sales (7,000 units, 7,500 units × $170)............
Variable expenses
(7,000 units × $68, 7,500 units × $74).........
Contribution margin.........................................
Fixed expenses.................................................
Net operating income.......................................

7,000 units
$1,190,000

7,500 units
$1,275,000

476,000
714,000
521,000
$ 193,000

555,000
720,000
521,000
$ 199,000

Increase in net operating income: $199,000 - $193,000 = $6,000

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 6 Cost-Volume-Profit Relationships
47. Data concerning Pellegren Corporation's single product appear below:
Selling price.......................
Variable expenses...............
Contribution margin...........

Per Unit
$200
40
$160

Percent of Sales

100%
20%
80%

Fixed expenses are $531,000 per month. The company is currently selling 4,000 units
per month. The marketing manager would like to cut the selling price by $14 and
increase the advertising budget by $35,000 per month. The marketing manager
predicts that these two changes would increase monthly sales by 500 units. What
should be the overall effect on the company's monthly net operating income of this
change?
A) decrease of $18,000
B) increase of $38,000
C) decrease of $38,000
D) increase of $58,000
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Sales (4,000 units × $200, 4,500 units × $186).
Variable expenses
(4,000 units × $40, 4,500 units × $40)...........
Contribution margin..........................................
Fixed expenses...................................................
Net operating income........................................

4,000 units
$800,000

4,500 units
$837,000

160,000
640,000
531,000
$109,000

180,000
657,000
566,000
$ 91,000

Decrease in net operating income: $109,000 - $91,000 = $18,000

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Chapter 6 Cost-Volume-Profit Relationships
48. Cobble Corporation produces and sells a single product. Data concerning that product
appear below:
Per Unit Percent of Sales
Selling price.......................
$160
100%
Variable expenses...............
48
30%
Contribution margin...........
$112
70%

Fixed expenses are $499,000 per month. The company is currently selling 5,000 units
per month. The marketing manager would like to cut the selling price by $13 and
increase the advertising budget by $33,000 per month. The marketing manager
predicts that these two changes would increase monthly sales by 900 units. What
should be the overall effect on the company's monthly net operating income of this
change?
A) increase of $56,100
B) decrease of $8,900
C) increase of $99,300
D) decrease of $56,100
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Sales (5,000 units × $160, 5,900 units × $147). .
Variable expenses
(5,000 units × $48, 5,900 units × $48)............
Contribution margin............................................
Fixed expenses....................................................
Net operating income..........................................

5,000 units
$800,000

5,900 units
$867,300

240,000
560,000
499,000
$ 61,000

283,200
584,100
532,000
$ 52,100

Decrease in net operating income: $61,000 - $52,100 = $8,900

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 6 Cost-Volume-Profit Relationships
49. Data concerning Bazin Corporation's single product appear below:
Selling price.......................
Variable expenses...............
Contribution margin...........

Per Unit
$100
20
$ 80

Percent of Sales
100%
20%
80%

Fixed expenses are $384,000 per month. The company is currently selling 6,000 units

per month. The marketing manager would like to introduce sales commissions as an
incentive for the sales staff. The marketing manager has proposed a commission of $9
per unit. In exchange, the sales staff would accept a decrease in their salaries of
$46,000 per month. (This is the company's savings for the entire sales staff.) The
marketing manager predicts that introducing this sales incentive would increase
monthly sales by 500 units. What should be the overall effect on the company's
monthly net operating income of this change?
A) increase of $27,500
B) decrease of $64,500
C) increase of $41,500
D) increase of $507,500
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Sales (6,000 units × $100, 6,500 units × $100). .
Variable expenses
(6,000 units × $20, 6,500 units × $29)............
Contribution margin............................................
Fixed expenses....................................................
Net operating income..........................................

6,000 units
$600,000

6,500 units
$650,000

120,000
480,000
384,000

$ 96,000

188,500
461,500
338,000
$123,500

Increase in net operating income: $123,500 - $96,000 = $27,500

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Chapter 6 Cost-Volume-Profit Relationships
50. Sannella Corporation produces and sells a single product. Data concerning that
product appear below:
Per Unit
Selling price.......................
$220
Variable expenses...............
66
Contribution margin...........
$154

Percent of Sales
100%
30%
70%

Fixed expenses are $991,000 per month. The company is currently selling 8,000 units
per month. The marketing manager would like to introduce sales commissions as an
incentive for the sales staff. The marketing manager has proposed a commission of
$11 per unit. In exchange, the sales staff would accept a decrease in their salaries of
$74,000 per month. (This is the company's savings for the entire sales staff.) The
marketing manager predicts that introducing this sales incentive would increase
monthly sales by 200 units. What should be the overall effect on the company's
monthly net operating income of this change?
A) increase of $1,246,600
B) increase of $14,600
C) decrease of $133,400
D) increase of $71,800
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Sales (8,000 units × $220, 8,200 units × $220)....
Variable expenses
(8,000 units × $66, 8,200 units × $77).............
Contribution margin.............................................
Fixed expenses.....................................................
Net operating income...........................................

8,000 units
$1,760,000

8,200 units
$1,804,000

528,000
1,232,000

991,000
$ 241,000

631,400
1,172,600
917,000
$ 255,600

Increase in net operating income: $255,600 - $241,000 = $14,600

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 6 Cost-Volume-Profit Relationships
51. Cherry Street Market reported the following information for the sales of their only
product, cherries sold by the pint:
Sales...................................
Variable expenses...............
Contribution margin...........
Fixed expenses...................
Net operating income.........

Total Per Unit
$31,500
$4.50
9,450
1.35
22,050

$3.15
13,000
$ 9,050

Cherry Street would like to increase their selling price by 50 cents per unit, and feel
that this will decrease sales volume by 10%. Should Cherry Street increase the price,
and what will the effect be on net operating income?
A) Yes; $3,500 increase
B) Yes; $945 increase
C) No; no change
D) No; $945 decrease
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Medium
Solution:
Current sales (dollars) = Current per unit price × Current sales (units)
$31,500 = $4.50 × Current sales (units)
7,000 = Current sales (units)
Sales (7,000 units × $4.50, 6,300 units × $5.00). . .
Variable expenses
(7,000 units × $1.35, 6,300 units × $1.35).........
Contribution margin...............................................
Fixed expenses.......................................................
Net operating income.............................................

7,000 units
$31,500

6,300 units
$31,500

9,450
22,050
13,000
$ 9,050

8,505
22,995
13,000
$ 9,995

Increase in net operating income: $9,995 - $9,050 = $945

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

6-31