ACCOUNTING 202 STRATEGIC BUSINESS ANALYSIS

INTRODUCTION TO MANAGEMENT ADVISORY SERVICES

ASSIGNMENT

1. Cost-volume-profit analysis is most important for the determination of the

A. Volume of operation necessary to break-even.
B. Sales revenue necessary to equal variable costs.
C. Variable revenues necessary to equal fixed costs.
D. Relationship between revenues and costs at various levels of operations.

2. The relevant range is

A. a relatively wide range of sales where all costs remain the same
B. a relatively wide range of sales where total variable costs remain the same
C. a relatively narrow range of production where total variable costs remain the same
D. a relatively wide span of production where total fixed costs are expected to remain the same

3. Which of the following assumptions does NOT pertain to cost-volume-profit analysis?

A. Inventories are constant
B. The total revenues function is linear.
C. All costs are classified as fixed or variable
D. The units produced will equal the units sold
E. Sales mix may vary during the related period

4. The sum of the costs necessary to effect a one-unit increase in the activity level is a(n)
A. Incremental cost. C. Marginal cost.
B. Margin of safety. D. Opportunity cost.

5. As an accountant, the most useful information you can get from break-even chart is the
A. Volume or output level at which the enterprise breaks even.
B. Amount of sales revenue needed to cover enterprise fixed costs.
C. Amount of sales revenue needed to cover enterprise variable costs.
D. Relationship among revenues, variable costs, and fixed costs at various levels of activity.

6. In a cost-volume-profit graph
A. the total revenue line crosses the horizontal axis at the breakeven point.
B. an increase in unit variable costs would decrease the slope of the total cost line.
C. an increase in the unit selling price would shift the breakeven point in units to the left.
D. an increase in the unit selling price would shift the breakeven point in units to the right.
E. beyond the breakeven sales volume, profits are maximized at the sales volume where total
revenues equal total costs.

7. In a cost-volume-profit graph, the slope of the total revenue curve represents

A. total contribution margin D. the selling price per unit.
B. total revenues. E. the variable cost per unit
C. the contribution margin per unit

8. In a profit-volume graph, the slope of the profit curve represents

A. the contribution margin per unit D. total contribution margin
B. the selling price per unit E. total revenues.
C. the variable cost per unit

9. If a company’s variable costs are 70% of sales, which formula represents the computation of dollar
sales that will yield a profit equal to 10% of the contribution margin when S equals sales in dollars for
the period and FC equals total fixed costs from the period?
A. S = FC  0.2 C. S = 0.2  FC
B. S = FC  0.27 D. S = 0.27  FC

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10. Cost-volume-profit analysis is a key factor in many decisions, including choice of product lines, pricing
of products, marketing strategy, and utilization of productive facilities. A calculation used in CVP
analysis is the break-even point. Once the break-even point has been reached operating income will
increase by the
A. Fixed cost per unit for each additional unit sold.
B. Sales price per unit for each additional unit sold.
C. Gross margin per unit for each additional unit sold.
D. Contribution margin per unit for each additional unit sold.

11. When used in cost-volume-profit analysis, sensitivity analysis

A. Determines the most profitable mix of products to be sold.
B. Allows the decision maker to introduce probabilities in the evaluation of decision alternatives.
C. Is limited because in cost-volume-profit analysis, costs are not separated into fixed and variable
components.
D. Is done through various possible scenarios and computes the impact on profit of various
predictions of future events.

12. At its present level of operations, a small manufacturing firm has total variable costs equal to 75
percent of sales and total fixed costs equal to 15 percent of sales. Based on variable costing, if sales
change by $1.00, income will change by
A. $0.10.
B. $0.25.
C. $0.75.
D. can't be determined from the information given.

13. A company’s breakeven point in sales dollars may be affected by equal percentage increases in both
selling price and variable costs per unit (assume all other factors are constant within the relevant
range.) The equal percentage changes in selling price and variable cost per unit will cause the
breakeven point in sales dollars to
A. Remain unchanged.
B. Increase by the percentage change in variable cost per unit.
C. Decrease by less than the percentage increase in selling price.
D. Decrease by more than the percentage increase in the selling price.

14. The most likely strategy to reduce the breakeven point would be to
A. Increase both the fixed costs and the contribution margin.
B. Decrease both the fixed cost and the contribution margin.
C. Increase the fixed costs and decrease the contribution margin.
D. Decrease the fixed costs and increase the contribution margin.

15. A company increased the selling price of its product from $1.00 to $1.10 a unit when total fixed costs
increased from $400,000 to $480,000 and variable cost per unit remained unchanged. How will these
changes affect the breakeven point?
A. The breakeven point in units will be increased.
B. The breakeven point in units will be decreased.
C. The breakeven point in units will remain unchanged.
D. The effect cannot be determined from the information given.

16. According to CVP analysis, a company could never incur a loss that exceeded its total
A. contribution margin. C. fixed costs.
B. costs. D. variable costs.

17. Two companies produce and sell the same product in a competitive industry. Thus, the selling price
of the product for each company is the same. Company 1 has a contribution margin ratio of 40% and
fixed costs of $25 million. Company 2 is more automated, making its fixed costs 40% higher than
those of Company 1. Company 2 also has a contribution margin ratio that is 30% greater than that of
Company 1. By comparison, Company 1 will have the <List A> breakeven point in terms of dollar sales
volume and will have the <List B> dollar profit potential once the indifference point in dollar sales

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 volume is exceeded.
A. B. C. D.
List A Lower Lower Higher Higher
List B Lesser Greater Lesser Greater

18. Which of the following is a true statement about sales mix?

A. Profits will remain constant with an increase in total dollars of sales if the total sales in units
remains constant.
B. Profits will remain constant with a decrease in total dollars of sales if the sales mix also remains
constant.
C. Profits may decline with an increase in total dollars of sales if the sales mix shifts to sell more of
the high contribution margin product.
D. Profits may decline with an increase in total dollars of sales if the sales mix shifts to sell more of
the lower contribution margin product.

19. Saints Co. sells three chemicals: Simpol, Plutex, and Coplex. Simpol is the most profitable product
while Coplex is the least profitable. Which one of the following events will definitely decrease the
firm’s overall B.E.P. for the upcoming accounting period?
A. A decrease in Coplex’s selling price.
B. An increase in Simpol raw materials cost.
C. An increase in the overall market of Plutex.
D. An increase in anticipated sales of Simpol relative to the sales of Plutex and Coplex.

20. A very high degree of operating leverage indicates a firm

A. has high fixed costs
B. has a high net income
C. has high variable costs
D. is operating close to its breakeven point

21. Love Corp. is operationally a highly leveraged company, that is, it has high fixed costs and low variable
costs. As such, small changes in sales volume result in
A. Large changes in net income. C. No change in net income.
B. Negligible change in net income. D. Proportionate change in net income.

22. A retail company determines its selling price by marking up variable costs 60%. In addition, the
company uses frequent selling price markdowns to stimulate sales. If the markdowns average 10%,
what is the company’s contribution margin ratio?
A. 27.5% C. 37.5%
B. 30.6% D. 41.7%

23. Ultra Vogue Co. sells 50,000 units of “yo” a top-of-the-line garden sprinkler. These were taken from
the company’s records:
Accounts receivable, P129,000. Contribution margin ratio, 49%.
Days sales outstanding, 15 days. Profit for the period was P485,040.
The ending receivables balance is the average balance during the year. Assume a 360-day year. All
sales are on credit. Determine the company’s break-even revenue.
A. P1,032,000 C. P2,106,122
B. P1,517,040 D. P3,096,000

24. Tonykinn Company is contemplating of marketing a new product. Fixed costs will be $800,000 for
production of 75,000 units or less and $1,200,000 if production exceeds 75,000 units The variable
cost ratio is 60% for the first 75,000. Contribution margin percentage will increase to 50% for units in
excess of 75,000. If the product is expected to sell for $25 per unit, how many units must Tonykinn
sell to breakeven?
A. 80,000 C. 111,000
B. 96,000 D. 120,000

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25. A company manufactures a single product. Estimated cost data regarding this product and other
information for the product and the company are as follows:
Sales price per unit $40
Total variable production cost per unit $22
Sales commission (on sales) 5%
Fixed costs and expenses
Manufacturing overhead $5,598,720
General and administrative $3,732,480
Effective income tax rate 40%
The number of units the company must sell in the coming year in order to reach its breakeven point
is
A. 388,800 units C. 583,200 units
B. 518,400 units D. 972,000 units

26. Merchandisers, Inc. sells Product O to retailers for P200. The unit variable cost is P40 with a selling
commission of 10%. Fixed manufacturing costs total P1,000,000 per month while fixed selling and
administrative costs total P420,000. The income tax rate is 30%. The target sales if after tax income
is P123,200 would be
A. 10,950 units. C. 13,750 units.
B. 11,400 units. D. 15,640 units.

27. Matias Corporation wishes to market a new product for P12.00 a unit. Fixed costs to manufacture
this product are P800,000 for less than 500,000 units and P1,200,000 for 500,000 or more units.
Contribution margin is 20%. How many units must be sold to realize a net income from this product
of P500,000?
A. 433,333 C. 666,667
B. 500,000 D. 708,333

28. NCB, Inc. manufactures computer tables. It has an investment of P1,750,000 in assets and expects a
25% return on investment. Its total fixed production costs for 2,000 units is P550,000 plus an
additional P150,000 for selling and administrative expenses. The variable cost to manufacture is
P1,500 per table. The selling price per table should be
A. P1,850.00 C. P2,531.25
B. P2,068.75 D. P2,725.00

29. Story Manufacturing incurs annual fixed costs of $250,000 in producing and selling "Tales." Estimated
unit sales for 2001 are 125,000. An after-tax income of $75,000 is desired by management. The
company projects its income tax rate at 40 percent. What is the maximum amount that Story can
expend for variable costs per unit and still meet its profit objective if the sales price per unit is
estimated at $6?
A. $3.00 C. $3.59
B. $3.37 D. $3.70

30. A company is concerned about its operating performance, as summarized below:

Sales ($12.50 per unit) $300,000
Variable costs 180,000
Net operating loss (40,000)
How many additional units should have been sold in order for the company to break even in 2019?
A. 8,000 C. 16,000
B. 12,800 D. 32,000

31. Scottso Enterprises has fixed costs of $120,000. At a sales volume of $400,000, return on sales is 10%.
At a $600,000 volume, return on sales is 20%. What is the break-even volume?
A. $160,000 C. $300,000
B. $210,000 D. $420,000

32. Nette & Co. has sales of P400,000 with variable costs of P300,000, fixed costs of P120,000, and an
operating loss of P20,000. By how much would Nette need to increase its sales in order to achieve a

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 target operating income of 10% of sales?
A. P400,000 C. P500,000
B. P462,000 D. P800,000

33. Sari-Sari Grocery is currently open only on Monday to Saturday. It is considering opening on Sundays.
The annual incremental costs of Sunday opening is estimated at P124,800. Its gross margin is 20%. It
estimates that 60% of Sunday sales to customers would be on other days if its stores were not open
on Sundays. The Sunday sales that would be necessary for Sari-sari to attain the same weekly
operating income is
A. P19,500. C. P29,250.
B. P20,000. D. P30,000.

34. ABC Company breaks even at $300,000 sales and earns $30,000 at $350,000 sales. Which of the
following is true?
A. Fixed costs are $20,000.
B. The selling price per unit is $3.
C. Contribution margin is 60% of sales.
D. Profit at sales of $400,000 would be $80,000.

35. A product has a selling price of P5 and variable cost of P3.50 per unit. The effect of a P0.50 per unit
increase in cost is to increase the break-even level of activity by
A. P1.50 per unit. C. 33-1/3%
B. 14.3% D. 50%

36. A company has sales of $500,000, variable costs of $300,000, and pretax profit of $150,000. If the
company increased the sales price per unit by 10%, reduced fixed costs by 20%, and left variable cost
per unit unchanged, what would be the new breakeven point in sales dollars?
A. $88,000 C. $110,000
B. $100,000 D. $125,000

37. Singsing, Inc. manufactures and sells key rings embossed with college names and slogans. Last year,
the key rings sold for P75 each, and the variable costs to manufacture them were P22.50 per unit.
The company needed to sell 20,000 key rings to break-even. The net income last year was P50,400.
The company expects the following for the coming year:
 The selling price of the key rings will be P90.
 Variable manufacturing costs per unit will increase by one-third.
 Fixed costs will increase by 10%.
 The income tax rate will remain unchanged.
For the company to break-even the coming year, the company should sell
A. 2,600 units. C. 21,250 units.
B. 19,250 units. D. 21,600 units.

38. Austin Manufacturing, which is subject to a 40% income tax rate, had the following operating data for
the period just ended.
Selling price per unit $ 60
Variable cost per unit 22
Fixed costs 504,000
Management plans to improve the quality of its sole product by: (1) replacing a component that
costs $3.50 with a higher-grade unit that costs $5.50 and (2) acquiring a $180,000 packing machine.
Austin will depreciate the machine over a 10-year life with no estimated salvage value by the
straight-line method of depreciation. If the company wants to earn after-tax income of $172,800 in
the upcoming period, it must sell
A. 19,300 units. C. 22,500 units.
B. 21,316 units. D. 23,800 units.

39. During 2019, RPS Corporation supplied hospitals with a comprehensive diagnostic kit for P120. At a
volume of 80,000 kits, RPS has fixed cost of P1,000,000 and a profit before income taxes of P200,000.

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 Due to an adverse legal decision, RPS’s 2020 liability insurance increased by P1,200,000 over 2019.
Assuming the volume and other costs are unchanged, what should be the 2020 price be if RPS is to
make the same P200,000 profit before income taxes?
A. P120. C. P150.
B. P135. D. P240.

40. Lindsay Company reported the following results from sales of 5,000 units of Product A for June:
Sales $200,000
Variable costs (120,000)
Fixed costs (60,000)
Operating income $ 20,000
Assume that Lindsay increases the selling price of Product A by 10 percent in July. How many units of
Product A would have to be sold in July to generate an operating income of $20,000?
A. 4,000 C. 4,500
B. 4,300 D. 5,000

41. CGW Corporation sells Product T at a unit price of P5 deriving annual gross sales of P50,000. The
variable cost to produce T is P4.50 per unit and total fixed costs is P10,000. If it increases T’s unit price
to P8, a decrease of sales to only 4,000 units would result. The effect of the price increase on CGW’s
net income from the sales of Product T will be a:
A. No effect. C. P9,000 increase.
B. P4,000 increase. B. P18,000 decrease.

42. Planners have determined that sales will increase by 25% next year, and that the profit margin will
remain at 15% of sales. Which of the following statements is correct?
A. Profit will grow by 25%.
B. The profit margin will grow by 15%.
C. Profit will grow proportionately faster than sales.
D. Ten percent of the increase in sales will become net income.

43. LXQ Turo Turo stores are open for 15 hours a day (from 6:00 a.m. to 9:00 p.m.). It sells packaged
meals at a price of P40 per meal. Variable cost per meal is P30 while total fixed costs for operation of
all the stores amounted to 200,000 monthly. It is thinking to reduce its store hours to only 12 hours
a day as this would reduce fixed costs (utilities and wages) by P60,000 a month. It is expected that
the reduced store hours would result in loss of 1,500 packed meals monthly sales. The reduction in
store hours would result in
A. No change in monthly operating income.
B. A prospective decrease in monthly operating income.
C. A prospective increase in monthly operating income of P45,000.
D. A prospective increase in monthly operating income of P60,000.

44. The Machan Manufacturing Company’s year-end income statement is as follows:

Sales (20,000 units) $360,000
Variable costs 220,000
Contribution margin $140,000
Fixed costs 105,000
Net income $ 35,000
Management is unhappy with the results and plans to make some changes for next year.
If management implements a new marketing program, fixed costs are expected to increase by
$19,200 and variable costs to increase by $1 per unit. Unit sales are expected to increase by 15
percent. What is the effect on income?
A. no change D. increase of $14,800
B. increase of $1,800 E. decrease of $21,200
C. increase of $13,800

Questions 45 and 46 are based on the following information.

The marketing department of Hennessy Co. proposed a price cut on its leading brand, a product called
“Henry.” From the accounting records these are available:

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 Price per unit P 92.00
Discount to customers 10%
Direct cost per unit P 52.60
Variable operating expense per unit P 5.60
Proposed price cut per unit P 10.00
Estimated sales volume before price cut 1,220 pcs.

45. How much is the estimated contribution margin that will be lost due to price cut, assuming the same
pre-price cut sales volume?
A. P10,980 C. P17,990
B. P13,000 D. P18,000

46. For the same Hennessy Co., in the immediately preceding number, what is the additional volume
required after the price cut to get the same contribution margin before the price cut? Round off to
the nearest whole unit.
A. 409 units C. 704 units
B. 500 units D. 1,000 units

47. A company with $280,000 of fixed costs has the following data:
Product A Product B
Sales price per unit $5 $6
Variable costs per unit $3 $5
Assume three units of A are sold for each unit of B sold. How much will sales be in dollars of product
B at the breakeven point?
A. $200,000 C. $280,000
B. $240,000 D. $840,000

Questions 48 and 49 are based on the following information.

A company sells two products, X and Y. The sales mix consists of a composite unit of two units of X for
every five units of Y (2:5). Fixed costs are $49,500. The unit contribution margins for X and Y are $2.50
and $1.20, respectively.

48. Considering the company as a whole, the number of composite units to break even is
A. 1,650 C. 8,250
B. 4,500 D. 22,500
49. If the company had a profit of $22,000, the unit sales must have been
A. B. C. D.
Product X 5,000 13,000 23,800 32,500
Product Y 12,500 32,500 59,500 13,000

50. Wheels Corp. employs 45 sales personnel to market its sedan cars. The average car sells for P690,000
and a 6% commission is paid to the sales person. It is considering changing the scheme to a
commission arrangement that would pay each person a package of P30,000 plus a commission of 2%
of the sales made by the person. The amount of total monthly car sales at which Wheels Corp. would
be indifferent (answer may be rounded off) as to which plan to select is
A. P22,500,000 C. P36,500,000
B. P33,750,000 D. P45,000,000

51. Two companies are expected to have annual sales of 1,000,000 decks of playing cards next year.
Estimates for next year are presented below:
Company 1 Company 2
Selling price per deck $ 3.00 $3.00
Cost of paper deck 0.62 0.65
Printing ink per deck 0.13 0.15
Labor per deck 0.75 1.25
Variable overhead per deck 0.30 0.35
Fixed costs $960,000 $252,000
Given these data, which of the following responses is correct?

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 (In units) A. B. C. D.
Breakeven point for Co. 1 533,334 533,334 800,000 800,000
Breakeven point for Co. 2 105,000 105,000 420,000 420,000
Volume at which profits of Co. 1
and Co. 2 are equal 1,000,000 1,180,000 1,000,000 1,180,000

52. Product Cott has sales of $200,000, a contribution margin of 20%, and a margin of safety of $80,000.
What is Cott’s fixed cost?
A. $16,000 C. $80,000
B. $24,000 D. $96,000

53. Bell Company has a 25% margin of safety. Its before-tax return on sales is 6%, and its tax rate is 40%.
Assuming that current sales are $120,000, what is Bell’s total fixed costs.
A. $21,600 C. $84,000
B. $36,000 D. $60,000

Questions 54 through 56 are based on the following information.

Almo Company manufactures and sells adjustable canopies that attach to motor homes and trailers. The
market covers both new unit purchasers as well as replacement canopies. Almo developed its business
plan based on the assumption that canopies would sell at a price of $400 each. The variable costs for
each canopy were projected at $200, and the annual fixed costs were budgeted at $100,000. Almo's
after-tax profit objective was $240,000; the company's effective tax rate is 40%.
While Almo's sales usually rise during the second quarter, the May financial statements reported that
sales were not meeting expectations. For the first 5 months of the year, only 350 units had been sold at
the established price, with variable costs as planned, and it was clear that the after-tax profit projection
would not be reached unless some actions were taken. Almo's president assigned a management
committee to analyze the situation and develop an alternative course of action. The following was
presented to the president.
Reduce the sales price by $40. The sales organization forecasts that with the significantly reduced sales
price, 2,700 units can be sold during the remainder of the year. Total fixed and variable unit costs will
stay as budgeted.

54. Assuming no changes were made to the selling price or cost structure, how many units must Almo sell
to break even?
A. 167 C. 500
B. 250 D. 1,700
55. Assuming no changes were made to the selling price or cost structure, how many units must Almo sell
to achieve its after-tax profit objective?
A. 1,250 C. 2,000
B. 1,700 D. 2,500

56. If management decides to reduce the selling price by $40, what will Almo's after-tax profit be?
A. $157,200 C. $241,200
B. $160,800 D. $301,200