1. The selling price is CU 40, the variable cost CU 24 per unit and fixed costs are CU 96,000. What is the break-even output?

A) 2,400 units
B) 4,000 units
C) 6,000 units
D) 8,000 units

Correct: C difficult CVP analysis

Contribution = 40 - 24 = CU 16 per unit. Break-even = 96,000 / 16 = 6,000 units. If you answered 4,000 units you divided by the variable cost of CU 24 (96,000 / 24). If you answered 2,400 units you divided by the selling price (96,000 / 40). If you answered 8,000 units you divided by a contribution of CU 12.

2. Using the same data (price CU 40, variable cost CU 24, fixed costs CU 96,000), what is the break-even sales revenue?

A) CU 144,000
B) CU 160,000
C) CU 240,000
D) CU 384,000

Correct: C difficult CVP analysis

The contribution to sales ratio is 16 / 40 = 40%. Break-even revenue = 96,000 / 0.40 = CU 240,000 (6,000 units x 40). If you answered CU 144,000 you divided by 0.667. If you answered CU 160,000 you divided by 0.6 (the variable cost ratio). If you answered CU 384,000 you multiplied by 4.

3. Budgeted sales are 8,000 units and the break-even point is 6,000 units. What is the margin of safety as a percentage of budgeted sales?

A) 20%
B) 33.3%
C) 75%
D) 25%

Correct: D difficult CVP analysis

Margin of safety = (8,000 - 6,000) / 8,000 = 25%. If you answered 33.3% you divided by the break-even sales (2,000 / 6,000). If you answered 75% you gave break-even as a percentage of budget. If you answered 20% you subtracted the percentages incorrectly.

4. The selling price is CU 40, variable cost CU 24 and fixed costs CU 96,000. How many units must be sold to achieve a profit of CU 48,000?

A) 3,000 units
B) 6,000 units
C) 12,000 units
D) 9,000 units

Correct: D difficult CVP analysis

Required contribution = fixed costs + target profit = 96,000 + 48,000 = CU 144,000. Units = 144,000 / 16 = 9,000. If you answered 6,000 you gave the break-even point. If you answered 3,000 you divided only the target profit by CU 16. If you answered 12,000 you used a contribution of CU 12.

5. If the selling price falls to CU 36 with variable cost at CU 24 and fixed costs at CU 96,000, what is the new break-even point?

A) 8,000 units
B) 2,667 units
C) 4,000 units
D) 6,000 units

Correct: A difficult CVP analysis

Contribution = 36 - 24 = CU 12 per unit. Break-even = 96,000 / 12 = 8,000 units. If you answered 6,000 you did not allow for the price cut. If you answered 4,000 you used 96,000 / 24. If you answered 2,667 you used 96,000 / 36.

6. A product sells for CU 15, has variable production cost of CU 5 and sales commission of 10% of the selling price. Fixed costs are CU 170,000 and budgeted sales are 26,000 units. What is the margin of safety as a percentage of budgeted sales?

A) 23.1%
B) 30.0%
C) 34.6%
D) 76.9%

Correct: A difficult CVP analysis

Commission = 1.50, so contribution = 15 - 5 - 1.50 = CU 8.50. Break-even = 170,000 / 8.50 = 20,000 units. Margin of safety = (26,000 - 20,000) / 26,000 = 23.1%. If you answered 76.9% you gave break-even as a percentage of budget. If you answered 30.0% you divided by break-even units (6,000 / 20,000). If you answered 34.6% you did not allow for the commission (contribution CU 10, break-even 17,000 units).

7. Product A sells for CU 20 with variable cost CU 12 and product B sells for CU 30 with variable cost CU 18. They are sold in the ratio 3 units of A to 2 units of B. Fixed costs are CU 240,000. What is the break-even output of product B?

A) 5,000 units
B) 10,000 units
C) 15,000 units
D) 20,000 units

Correct: B difficult CVP analysis

A standard pack of 3 A + 2 B gives contribution of 3 x 8 + 2 x 12 = CU 48. Break-even packs = 240,000 / 48 = 5,000 packs, so B = 5,000 x 2 = 10,000 units (and A = 15,000). If you answered 15,000 you gave the output of A. If you answered 5,000 you gave the number of packs. If you answered 20,000 you doubled the pack figure.

8. Machine hours are limited to 6,000. Contribution per unit and machine hours per unit are: X CU 24 (3 hours), Y CU 30 (5 hours), Z CU 18 (2 hours). Maximum demand is X 800, Y 700 and Z 1,000 units. What is the maximum total contribution?

A) CU 41,100
B) CU 43,000
C) CU 58,200
D) CU 46,800

Correct: D difficult Limiting factor

Rank by contribution per machine hour: Z 9, X 8, Y 6. Produce Z 1,000 (2,000 hours), X 800 (2,400 hours) and Y with the remaining 1,600 hours = 320 units. Contribution = 18,000 + 19,200 + 9,600 = CU 46,800. If you answered CU 41,100 you ranked by contribution per unit (Y first). If you answered CU 43,000 you ranked Y before X. If you answered CU 58,200 you ignored the hours limit and made all products to demand.

9. Which of the following are assumptions of basic cost-volume-profit analysis? (1) The selling price per unit is constant. (2) Fixed costs are constant within the relevant range. (3) Costs are all variable.

A) (1) and (2) only
B) (1) only
C) (2) and (3) only
D) (1), (2) and (3)

Correct: A difficult CVP analysis

Basic CVP analysis assumes a constant selling price, constant variable cost per unit and fixed costs that stay constant within the relevant range. It does not assume that costs are all variable.

10. A component can be bought for CU 15 each. In-house, 1,000 components cost CU 11 each in variable costs plus avoidable fixed costs of CU 3,000. Other fixed costs are unavoidable. What is the financial result of making rather than buying?

A) Making saves CU 4,000
B) Buying saves CU 1,000
C) Buying saves CU 5,000
D) Making saves CU 1,000

Correct: D difficult Relevant costs

Cost to make = 1,000 x 11 + 3,000 avoidable = CU 14,000. Cost to buy = 1,000 x 15 = CU 15,000. Making saves CU 1,000. If you answered making saves CU 4,000 you ignored the avoidable fixed cost. If you answered buying saves CU 1,000 you reversed the result.

11. A product line has contribution of CU 40,000, avoidable fixed costs of CU 25,000 and unavoidable fixed costs of CU 20,000 allocated to it. What is the effect on total profit of closing the line?

A) Profit rises by CU 5,000
B) Profit rises by CU 20,000
C) Profit falls by CU 15,000
D) Profit falls by CU 40,000

Correct: C difficult Relevant costs

Closing the line loses contribution of CU 40,000 and saves CU 25,000 of avoidable fixed costs, so profit falls by CU 15,000. The unavoidable CU 20,000 continues. If you answered that profit rises by CU 5,000 you treated the allocated fixed costs as if they could be saved.

12. Currently the price is CU 40, variable cost CU 24, fixed costs CU 96,000 and sales 8,000 units. A price rise of 10% is expected to reduce sales by 5%. What would the profit be after the change?

A) CU 56,000
B) CU 32,000
C) CU 64,000
D) CU 152,000

Correct: A difficult CVP analysis

New price = CU 44, so contribution = CU 20. New sales = 7,600 units. Profit = 7,600 x 20 - 96,000 = CU 56,000. If you answered CU 32,000 you gave the original profit. If you answered CU 64,000 you ignored the fall in volume. If you answered CU 152,000 you did not deduct fixed costs.

13. Sales are CU 500,000, variable costs CU 300,000 and fixed costs CU 120,000. Sales are expected to rise by CU 100,000 with the same cost behaviour. What is the effect on profit?

A) An increase of CU 60,000
B) An increase of CU 40,000
C) An increase of CU 80,000
D) An increase of CU 100,000

Correct: B difficult CVP analysis

The contribution to sales ratio is (500,000 - 300,000) / 500,000 = 40%. Extra contribution = 40% x 100,000 = CU 40,000. If you answered CU 60,000 you used the variable cost ratio. If you answered CU 100,000 you assumed all extra sales are profit. If you answered CU 80,000 you doubled the figure.

14. Which of the following are true of limiting factor analysis? (1) Products are ranked by contribution per unit of the scarce resource. (2) It can be used where there is more than one scarce resource without further techniques. (3) Fixed costs do not affect the ranking.

A) (1) and (2) only
B) (1) and (3) only
C) (2) and (3) only
D) (1), (2) and (3)

Correct: B difficult Limiting factor

Ranking by contribution per unit of the limiting factor maximises contribution, and fixed costs do not change with the choice so they do not affect the ranking. The basic method applies to a single scarce resource; several constraints require linear programming.

15. Product P has contribution of CU 6 per unit and product Q CU 10. Fixed costs are CU 60,000. The mix changes from 1:1 to 1:3 (P:Q). What is the break-even output in total units after the change?

A) 3,750 units
B) 6,667 units
C) 7,500 units
D) 10,000 units

Correct: B difficult CVP analysis

New pack of 1 P + 3 Q has 4 units and contribution 6 + 30 = CU 36. Break-even packs = 60,000 / 36 = 1,667, or 6,667 units (the old mix gave 7,500 units). If you answered 7,500 you used the old mix. If you answered 10,000 you divided by the contribution of P only. If you answered 3,750 you gave the number of old packs.

16. A product sells for CU 40 with variable cost CU 24; fixed costs are CU 96,000. Sales are 7,500 units. What is the margin of safety as a percentage of actual sales?

A) 20%
B) 25%
C) 80%
D) 40%

Correct: A difficult Breakeven analysis

Breakeven = 96,000 / 16 = 6,000 units. Margin of safety = (7,500 - 6,000) / 7,500 = 20%. If you answered 25% you divided by the breakeven point (1,500 / 6,000). If you answered 80% you gave breakeven as a percentage of sales. If you answered 40% you gave the contribution/sales ratio.

17. A product sells for CU 40 with variable cost CU 24; fixed costs are CU 96,000. The company wants profit after tax of CU 48,000 and the tax rate is 20%. How many units must be sold?

A) 9,000
B) 6,000
C) 3,000
D) 9,750

Correct: D difficult Breakeven analysis

Profit before tax = 48,000 / 0.8 = CU 60,000. Units = (96,000 + 60,000) / 16 = 9,750. If you answered 9,000 you ignored tax. If you answered 6,000 you gave the breakeven point. If you answered 3,000 you divided the target profit by the contribution and ignored fixed costs.

18. Contribution is 40% of sales and fixed costs are CU 120,000. What sales revenue is required to make a profit of CU 30,000?

A) CU 300,000
B) CU 75,000
C) CU 375,000
D) CU 150,000

Correct: C difficult Breakeven analysis

Required contribution = 120,000 + 30,000 = CU 150,000. Sales = 150,000 / 0.40 = CU 375,000. If you answered CU 300,000 you gave breakeven revenue. If you answered CU 75,000 you divided the profit alone by 0.40. If you answered CU 150,000 you gave the required contribution.

19. Product A has a price of CU 20 and variable cost CU 12; Product B has a price of CU 30 and variable cost CU 18. They are sold in the ratio 3 A : 2 B. Fixed costs are CU 108,000. How many units of A are sold at breakeven?

A) 4,500
B) 13,500
C) 6,750
D) 9,000

Correct: C difficult Breakeven analysis

Contribution per mix of 5 units = 3 x 8 + 2 x 12 = CU 48. Breakeven mixes = 108,000 / 48 = 2,250. Units of A = 2,250 x 3 = 6,750. If you answered 4,500 you gave units of B. If you answered 13,500 you divided fixed costs by A's contribution only. If you answered 9,000 you divided by B's contribution only.

20. Products X, Y and Z have contributions of CU 24, CU 30 and CU 20 per unit and use 4, 6 and 2 machine hours per unit. Maximum demand is 2,000, 1,500 and 3,000 units. Machine hours available are 16,000. What is the maximum total contribution?

A) CU 87,000
B) CU 118,000
C) CU 123,000
D) CU 108,000

Correct: B difficult Limiting factor analysis

Contribution per hour: X 6, Y 5, Z 10. Rank Z, X, Y. Z: 3,000 units (6,000 hours); X: 2,000 units (8,000 hours); Y: 2,000 hours remain = 333 units. Contribution = 60,000 + 48,000 + 10,000 = CU 118,000. If you answered CU 87,000 you ranked by contribution per unit (Y first). If you answered CU 123,000 you made 500 units of Y using 4 hours per unit. If you answered CU 108,000 you produced Z and X only and made no Y with the remaining 2,000 hours.

21. Products X, Y and Z have contributions of CU 24, CU 30 and CU 20 per unit and use 4, 6 and 2 machine hours per unit. Maximum demand is 2,000, 1,500 and 3,000 units. Machine hours available are 16,000. The company could obtain extra machine hours. What is the maximum extra price per hour (above the normal cost already deducted in contribution) it should pay?

A) CU 6
B) CU 10
C) CU 30
D) CU 5

Correct: D difficult Limiting factor analysis

With the plan above, the marginal use of an extra hour is to make more of Y, earning CU 30 / 6 = CU 5 per hour. If you answered CU 6 you used X's contribution per hour. If you answered CU 10 you used Z's contribution per hour (already at maximum demand). If you answered CU 30 you used Y's contribution per unit.

22. A product sells for CU 40 with variable cost CU 24; fixed costs are CU 96,000. The price is increased by 10% to CU 44 (variable cost unchanged). What is the new breakeven point?

A) 5,400 units
B) 5,455 units
C) 4,800 units
D) 6,000 units

Correct: C difficult Breakeven analysis

New contribution = 44 - 24 = CU 20. Breakeven = 96,000 / 20 = 4,800 units. If you answered 5,400 you reduced the old breakeven by 10%. If you answered 5,455 you divided the old breakeven by 1.1. If you answered 6,000 you ignored the price change.

23. A product sells for CU 40 with variable cost CU 24; fixed costs are CU 96,000. Sales are 7,500 units. If sales fall by 10%, by what percentage will profit fall?

A) 10%
B) 50%
C) 5%
D) 500%

Correct: B difficult Breakeven analysis

Profit at 7,500 units = 120,000 - 96,000 = CU 24,000. At 6,750 units = 108,000 - 96,000 = CU 12,000, a 50% fall. Operating gearing = 120,000 / 24,000 = 5, so 10% x 5 = 50%. If you answered 10% you assumed profit moves with sales. If you answered 5% you divided by the gearing. If you answered 500% you gave gearing as a percentage.

24. Which TWO of the following are assumptions of simple breakeven analysis? (1) Selling price and variable cost per unit are constant. (2) Fixed costs remain constant within the relevant range. (3) The sales mix changes at each level of output.

A) (1) and (2)
B) (1) and (3)
C) (2) and (3)
D) (1) only

Correct: A difficult Breakeven analysis

Simple breakeven analysis assumes linear revenue and variable costs, fixed costs constant in the relevant range, and a constant sales mix.

25. A component costs CU 8 to make (variable) using 2 hours of scarce labour, or CU 12 to buy. Labour hours can alternatively earn a contribution of CU 10 per hour in making Product Q. What should the company do?

A) Make: CU 8 is less than CU 12
B) Make: making saves CU 4 per hour
C) Buy: CU 12 is less than the CU 10 contribution per hour
D) Buy: making saves only CU 2 per scarce hour (4 / 2), less than the CU 10 earned elsewhere

Correct: D difficult Limiting factor analysis

Making saves CU 4 per unit, or CU 2 per labour hour. Each hour used on Product Q earns CU 10, so the scarce hours are better used on Q and the component should be bought. The other options ignore the limiting factor or misstate the saving.