Chapter (3): Cost Volume Profit Analysis

1st MCQ Questions

1) Cost Volume Profit analysis is used PRIMARILY by management:
A) as a planning tool
B) for control purposes
C) to prepare external financial statements
D) to attain accurate financial results

2) If the breakeven point is 100 units and each unit sells for $50, then:
A) Selling 125 units will result in a profit
B) Sales of $4,000 will result in a loss
C) Sales of $5,000 will result in zero profit
D) All of these answers are correct.

3) Contribution margin equals:

A) revenues minus nonmanufacturing costs
B) revenues minus manufacturing costs
C) revenues minus variable costs
D) revenues minus fixed costs

4) The breakeven point is the activity level where:

A) revenues equal fixed costs
B) revenues equal variable costs
C) contribution margin equals variable costs
D) revenues equal the sum of variable and fixed costs

5) Breakeven point is:

A) total costs divided by variable costs per unit
B) contribution margin per unit divided by revenue per unit
C) fixed costs divided by contribution margin per unit
D) the sum of fixed and variable costs divided by contribution margin per unit

6) Which of the following statements about determining the breakeven point is FALSE?
A) Operating income is equal to zero.
B) Contribution margin - fixed costs is equal to zero.
C) Revenues equal fixed costs plus variable costs.
D) Breakeven revenues equal fixed costs divided by the variable cost per unit.

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7) If unit outputs exceed the breakeven point:
A) there is a loss
B) total sales revenue exceeds total costs
C) there is a profit
D) Both total sales revenue exceeds total costs and there is a profit.

8) The break-even point in UNIT sales is found by dividing total fixed cost by:
A) the contribution margin ratio.
B) the variable cost per unit.
C) the sales price per unit.
D) the contribution margin per unit.

9) The break-even point in DOLLAR sales is found by dividing total fixed cost by:
A) the contribution margin ratio.
B) the variable cost per unit.
C) the sales price per unit.
D) the contribution margin per unit.

10) The margin of safety is the difference between:

A) budgeted cost and breakeven cost
B) budgeted revenues and breakeven revenues
C) actual operating income and budgeted operating income
D) actual contribution margin and budgeted contribution margin

11) The margin of safety percentage is computed as:

A) Break-even sales  Total sales.
B) Total sales - Break-even sales.
C) (Total sales - Break-even sales)  Break-even sales.
D) (Total sales - Break-even sales)  Total sales.

12) The amount by which a company's sales can decline before losses are incurred is called the:
A) Contribution margin.
B) Net operating income.
C) Margin of safety.
D) Contribution margin ratio.

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 2nd True or False Questions
1) To perform CVP analysis, a company must be able to separate costs into fixed and variable

components. (True)

2) The variable cost per unit is $12 and the selling price per unit is $40. Then the CM ratio is 70%.

(True)

3) The break Even point in Units can be obtained by dividing total fixed cost by the contribution

margin ratio. (False)

4) Breakeven point is that quantity of output where total revenues equal total costs. (True)

5) It is assumed in CVP analysis that the unit selling price, unit variable costs, and Unit fixed costs are

known and constant. (False)

6) In CVP analysis, the number of output units is the only Revenue driver. (False)

7) If the selling price per unit is $20 and the contribution margin percentage is 30%, then the variable

cost per unit must be $6. (False)

8) Total revenues less total fixed costs equal the contribution margin. (False)

9) If the selling price per unit of a product is $30, variable costs per unit are $20, and total fixed costs

are $10,000 and a company sells 5,000 units, operating income would be $40,000. (True)

10) If the selling price per unit is $50, variable costs per unit are $40, and total fixed costs are
$
50,000, a company must sell 6,000 units to make a target operating income of $10,000. (True)

11) At the break Even point: Sales - Variable cost = Fixed cost. (True)

12) Margin of safety measures the difference between budgeted revenues and breakeven revenues.

(True)

13) The margin of safety percentage is equal to the margin of safety in dollars divided by total sales in

dollars. (True)

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 3rd Practical Problems
Exercise (1):
Kalbach Corporation a Company has provided the following financial data for November:
$
Sales 440,000
$
Variable Production cost 60,000
$
Variable Selling cost 70,000
$
Fixed Production cost 95,000
$
Fixed Selling cost 86,000
$
Fixed Administrative cost 93,000

The Contribution Margin for November was:

$ $ $ $
A) 285,000 B) 166,000 C) 310,000 D) 36,000

Solution
Sales Revenue  440,000 Income Statement ‫أنت عملت الـ‬
Contribution ‫كاملة بس هو عايس‬
(-) Variable Cost  (60,000 + 70,000) (130,000)
C ‫ بس يبقي االجابة الصح‬Margin
Contribution Margin (CM) 310,000

(-) Fixed cost  (95,000 + 86,000 + 93,000) (274,000)

Net operating income 36,000

Exercise (2):
Christi Manufacturing provided the following information for last month:
$
Sales 10,000
$
Variable costs 3,000
$
Fixed costs 5,000
$
Operating income 2,000

If Sales double next month, what is the projected operating income?

$ $ $ $
A) 4,000 B) 17,000 C) 9,000 D) 12,000

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 Solution
$
Sales Revenue  ($10,000 x 2) 20,000

(-) Variable Cost  ($3,000 x 2) (6,000)

Contribution Margin (CM) 14,000

(-) Fixed cost  (Constant) (5,000) Correct Answer is C

Net operating income 9,000

Exercise (3):
Tempcon Inc, sells laptops for $3,000 per furnace, The following Cost Formula relates to Tempcon:
$ $
Y = 125,000 + 1,800 X

If Tempcon sold 500 laptops last year what was its total Contribution Margin last year?
$ $ $ $
A) 475,000 B) 900,000 C) 102,500 D) 600,000

Solution
$
Sales Revenue  (500 Units x $
3,000 S.P) 1,500,000

(-) Variable Cost  (500 Units x $

1,800 VC) (900,000) Correct Answer is D
Contribution Margin (CM) 600,000

(-) Fixed cost  (Constant) (125,000)

Net operating income 475,000

Exercise (4):
Fixed costs equal $12,000, Unit Contribution Margin equals $20, and the number of units sold equal 1,600
Units.

1) Operating income is:

$ $ $ $
A) 12,000 B) 20,000 C) 32,000 D) 40,000

2) If Variable Cost represents 60% of Selling Price, What is the Selling Price per Unit:
$ $ $ $
A) 20 B) 50 C) 30 D) 100

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 Solution
1) Operating income is:

Sales Revenue  Xx

(-) Variable Cost  Xx

Contribution Margin (CM) (1,600 units x $

20) 32,000

(-) Fixed cost  (Constant) (12,000)

Net operating income 20,000

2) Selling Price per Unit:

$
CM 20 40%
 CM% = 100% - VC% = 100% - 60% = 40%
%
SP ??? 100%
100 $
 SP = $
20 x = 50
%
40

Exercise (5):
Smith Company sells a single product at a Selling price of $30 per unit. Variable cost is $12 per unit and

Fixed Cost is $41,400. Smith's break even point is:

A) 1,380 units B) 2,300 units C) 3,450 units D) 6,900 units

Solution
%
CM ‫ و‬CM/Unit ‫ يبقي قبل ما حتل الزم حتسب حاجتني‬Break Even ‫اقرا املسألة بسرعة القيت فيها كلمة‬

 CM/ Unit = SP/Unit - VC/Unit

$ $ $
= 30 - 12 = 18

 CM% = CM/Unit ÷ SP/Unit

$
Total
$
FC 41,400
= # units
break-even in 18 =÷ =%
30 = 60 = 2,300 units
CM/U 30 – 12

B
$
Total Fixed Cost 41,400
Break Even in Units = =
$
= 2,300 units
CM/ Unit 18

$
Total Fixed Cost 41,400
$
Break Even in Dollars =
%
=
%
= 69,000
CM 60

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Exercise (6):
What is the breakeven point in units, assuming a product's Selling Price is $100, Fixed Costs are $8,000,

Unit Variable Costs are $20, and Operating Income is $32,000?

A) 100 units B) 300 units C) 400 units D) 500 units

Solution

 CM/ Unit = SP/Unit - VC/Unit

$ $ $
= 100 - 20 = 80

 CM% = CM/Unit ÷ SP/Unit

Total FC 41,400 2,300 units
$ $ %
= # units
break-even in 80 =÷ 100 = =80 =
CM/U 30 – 12

Break Even in Units =

Total Fixed Cost
=
$
8,000
= 100 units
A
$
CM/ Unit 80

Exercise (7):
$
Selling price 30 per unit
$
Variable manufacturing cost 15 per unit
$
Fixed manufacturing cost 80,000
$
Variable Selling & Administrative cost 3 per unit
$
Fixed Selling & Administrative cost 40,000

The Break Even Point in Dollars:

$ $ $ $
A) 300,000 B) 240,000 C) 200,000 D) 160,000

Solution

 CM/ Unit = SP/Unit - VC/Unit

$
= 30 - ($15 + 3) = $
12

 CM% = CM/Unit ÷ SP/Unit

$ $
= 12 ÷ 30 = 40%

$
A
Total Fixed Cost 120,000
$
Break Even in Dollars =
%
=
%
= 300,000
CM 40

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Exercise (8):
Sales total $200,000 when Variable Costs total $150,000 and Fixed Costs total $30,000. The breakeven

point in Sales dollars is:

$ $ $ $
A) 200,000 B) 120,000 C) 40,000 D) 30,000

Solution

 CM = Sales - VC
$ $ $
= 200,000 - 150,000 = 50,000

 CM% = CM ÷ Sales
$ $
= 50,000 ÷ 200,000 = 25%

$
Total Fixed Cost 30,000
$
Break Even in Dollars =
%
=
%
= 120,000
CM 25

Exercise (9):
Street Company's Fixed Cost total $150,000, its Variable Cost Ratio is 60% and its Variable Cost is $4.5

per unit. Based on this information, the break Even point in units is:

A) 50,000 units B) 37,500 units C) 33,333 units D) 100,000 units

Solution

$
Selling Price Per Unit is Not Given = $
4.5 x (100/60) = $
7.5 VC 4.5 60%

SP ??? 100%

 CM/unit = SP/Unit - VC/Unit

$ $ $
= 7.5 - 4.5 = 3

 CM% = CM ÷ Sales
$ $
= 3 ÷ 7.5 = 40%

Break Even in Units =

Total Fixed Cost
=
$
150,000
= 50,000 units
A
$
CM/ Unit 3

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Exercise (10):
When fixed costs are $100,000 and Variable costs are 20% of the selling price, then breakeven sales are:
$ $ $
A) 100,000 B) 125,000 C) 500,000 D) Indeterminable

Solution
$
Total Fixed Cost 100,000
$
Break Even in Dollars = = = 125,000
CM % %
100 - 20 %
B

Exercise (11):
Rider Company sells a single product. The product has a Selling Price of $40 per unit and variable cost of
$
15 per unit. The company's fixed cost total $30,000 per year. The company's break-even point in terms

of Total Dollar Sales:

A) $48,000 B) $30,000 C) $1,200 D) $50,000

Solution

 CM/ Unit = SP/Unit - VC/Unit

$
= $
40 - $
15 = 25

 CM% = CM/Unit ÷ SP/Unit

%
= $
25 ÷ $
40 = 62.5

$
Total Fixed Cost 30,000
$
Break Even in Dollars =
%
=
%
= 48,000
CM 62.5

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Exercise (12):
$ $
Last year, Farrer Corporation had Sales of 1,500,000, Variable Costs of 900,000, and fixed

costs of $400,000. What would be the dollar sales at the break even point?

A) $1,300,000 B) $1,000,000 C) $1,380,000 D) $1,200,000

Solution

 Total CM = Total Sales - Total VC

$
= $
1,500,000 - $
900,000 = 600,000

 CM% = Total CM ÷ Total Sales

%
= $
600,000 ÷ $
1,500,000 = 40

$
Total Fixed Cost 400,000
$
Break Even in Dollars =
%
=
%
= 1,000,000
CM 40

Exercise (13):
The following is last month's contribution format income statement:
Sales (20,000 units) 1,800,000

(-) Variable Costs (1,200,000)

Contribution Margin (CM) 600,000

(-) Fixed costs (400,000)

Net operating income 200,000

What is the company's break-even in Units?

A) 20,000 Units B) 13,333 Units C) 10,000 Units D) 15,000 Units

What is the company's break-even in Dollars?

A) $1,200,000 B) $0 C) $1,800,000 D) $1,600,000

Solution

 CM/Unit = Total CM ÷ Number of Units

$
= $
600,000 ÷ 20,000 Units = 30 per unit

 CM% = Total CM ÷ Total Sales

%
= $
600,000 ÷ $
1,800,000 = 33.3

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 $
Total Fixed Cost 400,000
Break Even in Units = =
$
= 13,333 Units
CM/Unit 30

$
Total Fixed Cost 400,000
$
Break Even in Dollars =
%
=
%
= 1,200,000
CM 33.3

Exercise (14):
At the breakeven point of 200 units, Variable Costs total $400 and Fixed costs total $600. The

201st unit sold will contribute ___________ to profits.

A) $1 B) $2 C) $3 D) $5

Solution
$
Total Fixed Cost 600
Break Even in Units = = = 200 Units
CM/Unit CM/Unit

$
600
$
CM/Unit = = 3 Per Unit
200 Units

Exercise (15):
South Company sells a single product for $20 per unit. If variable costs are 60% of sales and fixed

costs total $9,600, the break-even point will be:

A) $24,000 B) $14,400 C) $9,600 D) $16,000

Solution

 CM% = 100% - VC%

%
= 100% - 60% = 40 of Sales

 CM/Unit = 40% x Sales

$
= 40% x $
20 = 8 Per Unit

$
Total Fixed Cost 9,600
$
Break Even in Dollars =
%
=
%
= 24,000
CM 40

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Exercise (16):
When Fixed Costs are $100,000 and variable costs are 20% of the selling price, then breakeven Sales are:
$ $ $
A) 100,000 B) 125,000 C) 500,000 D) Indeterminable

Solution

 CM% = 100% - VC%

%
= 100% - 20% = 80

$
Total Fixed Cost 100,000
$
Break Even in Dollars =
%
=
%
= 125,000
CM 80

Exercise (17):
The management of Harper Corporation a company has provided the following data for December:
Sales 480,000
Variable production cost 76,000
Fixed production cost 85,000
Variable selling cost 18,000
Fixed selling cost 83,000
Variable administrative cost 46,000
Fixed administrative cost 108,000

The Contribution Margin for December was:

$ $ $ $
A) 204,000 B) 64,000 C) 340,000 D) 319,000

Solution

Sales Revenue  480,000

(-) Variable Cost  (76,000 + 18,000 + 46,000) (140,000)

Contribution Margin (CM) 340,000

(-) Fixed cost  (85,000 + 83,000 + 108,000) (276,000)

Net operating income 64,000

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Exercise (18):
Northenscold Company sells single product. Information of average revenue and costs is as follows:
$
Selling price per unit 20
Variable Costs per unit:
$
Direct material 4
$
Direct labor 1.6
$
Manufacturing overhead 0.4
$
Selling costs 2
$
Annual fixed costs 96,000

The contribution Margin per unit is:

$ $ $ $
A) 6 B) 8 C) 12 D) 14

The contribution Margin Ratio is:

A) 30% B) 40% C) 60% D) 70%

The number of UNITS that Northenscold’s must sell each year to break even is:
A) 8,000 units B) 12,000 units C) 16,000 units D) Indeterminable

The number of units that Northenscold’s must sell annually to make a profit of $144,000 is:
A) 12,000 units B) 18,000 units C) 20,000 units D) 30,000 units

Solution
CM/ Unit = SP/Unit - VC/Unit
$
= $
20 $
- ( 4 + 1.6 + 0.4 + 2) = 12

CM Ratio = CM/Unit ÷ SP/Unit

= $
12 ÷ $
20 = 60%

$
Total Fixed Cost 96,000
Break Even in Units = = $
= 8,000 Units
CM/Unit 12

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Exercise (19):
Berhannan’s Cellular sells phones for $100. The Variable cost per phone is $50 plus a selling commission of

10%. Fixed manufacturing costs total $1,250 per month, while fixed selling and administrative costs total
$
2,500.

1) The contribution margin per phone:

$ $ $ $
A) 50 B) 40 C) 60 D) 30

2) The breakeven point in phones:

A) 60 phones B) 70 phones C) 93.75 phones D) 90 phones

3) How many phones must be sold to earn income of $7,500:

A) 281.25 phones B) 250 phones C) 200 phones D) 230 phones

Solution
CM/ Unit = SP/Unit - VC/Unit
$
= $
100 - ($50 + 10) = 40

$
Total Fixed Cost 1,250 + 2,500
Break Even in Units = =
$
= 93.75 Units
CM/Unit 40

Exercise (20):
Blankinship, Inc., sells a single product. The company's most recent income statement is given below.

Sales 200,000

(-) Variable costs (120,000)

Contribution margin (CM) 80,000

(-) Fixed costs (50,000)

Net operating income 30,000

1) Contribution margin ratio is:

A) 80% B) 40% C) 50% D) 20%

2) Breakeven point in total sales dollars is:

$ $ $ $
A) 125,000 B) 100,000 C) 50,000 D) 200,000

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 3) If Sales double Next month, the Projected Operating Income will be:
$ $ $ $
A) 60,000 B) 110,000 C) 160,000 D) 30,000

4) To achieve $40,000 in net income, sales must total :

$ $ $
A) 125,000 B) 225,000 C) 300,000 D) $150,000

5) If sales increase by $50,000, net income will increase by:

A) $40,000 B) $20,000 C) $10,000 D) $30,000

Solution
CM Ratio = Total CM ÷ Total Sales

= $
80,000 ÷ $
200,000 = 40%

$
Total Fixed Cost 50,000
$
Break Even in Dollars =
%
=
%
= 125,000
CM 40

Operating Income if Sales are doubled:

$
Sales Revenue  ($200,000 x 2) 400,000

(-) Variable Cost  ($120,000 x 2) (240,000)

Contribution Margin (CM) 160,000

(-) Fixed cost  (Constant) (50,000)

Net operating income 110,000

Exercise (21):
$
Nancy’s Niche sells a single product. 8,000 units were sold resulting in 80,000 of Sales Revenue,
$
20,000 of Variable Costs, and $10,000 of Fixed Costs.

1) The Net Operating Income is:

$ $ $ $
A) 60,000 B) 70,000 C) 50,000 D) 80,000

2) The Total Contribution Margin is:

$ $ $ $
A) 60,000 B) 70,000 C) 50,000 D) 80,000

3) The Contribution Margin Percentage is:

A) 12.5% B) 25.0% C) 37.5% D) 75.0%

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 4) The breakeven point in Units is:
A) 8,000 Units B) 1,333 Units C) 1,000 Units D) None of these.

5) The breakeven point in Total Sales Dollars is:

$ $ $
A) 40,000 B) 13,334 C) 100,000 D) None of these.

6) To achieve $100,000 in operating income, sales must total:

A) $440,000 B) $160,000 C) $130,000 D) None of these.

Solution

Total Per Unit Ratio

‫تيجي بالضرب‬ ‫الفلوس على الشغل‬ Sales ‫الفلوس على‬

$
$ 10 100%
Sales Revenue  80,000
($80,000 ÷ 8,000 U) ($80,000 ÷ $80,000)

($2.5) (25%)
(-) Variable Cost  (20,000) $ $
( 20,000 ÷ 8,000 U) ( 20,000 ÷ $80,000)

$
Contribution Margin (CM) 60,000 7.5 75%

(-) Fixed cost  (Constant) (10,000)

Net operating income 50,000

$
Total Fixed Cost 10,000
Break Even in Units = =
$
= 1.334 Units
CM/Unit 7.5

$
Total Fixed Cost 10,000
$
Break Even in Dollars =
%
=
%
= 13,334
CM 75

Exercise (23):
How many units would have to be sold to yield a target operating income of $22,000, assuming variable

costs are $15 per unit, total fixed costs are $2,000, and the unit selling price is $20?

A) 4,800 units B) 4,400 units C) 4,000 units D) 3,600 units

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Exercise (24):
If breakeven point is 100 units, each unit sells for $30, and fixed costs are $1,000, then on a graph the:
A) total revenue line and the total cost line will intersect at $3,000 of revenue
B) total cost line will be zero at zero units sold
C) revenue line will start at $1,000
D) All of these answers are correct.

Exercise (25):
If the contribution-margin ratio is 0.30, targeted net income is $76,800, and targeted sales volume in

dollars is $480,000, then total fixed costs are:

A) $23,000 B) $44,160 C) $67,200 D) $144,000

Exercise (26):
The following information is for Nichols Company:
$
Selling price 150 per unit
$
Variable costs 90 per unit
$
Total fixed costs 300,000

The number of units that Nichols Company must sell to reach targeted operating income of $90,000 is:
A) 5,000 units B) 6,500 units C) 3,334 units D) 4,334 units

If targeted operating income is $120,000, then targeted sales revenue is:

A) $1,050,000 B) $700,000 C) $500,000 D) $750,000

Exercise (27):
A product sells for $20 per unit and has a contribution margin ratio of 40 percent. Fixed costs total
$
240,000 annually. How many units of the product must be sold to yield a profit of $60,000?
A) 37,500 units B) 40,000 units C) 65,000 units D) 30,000 units

Exercise (28):
Puchalla Corporation sells a product for $230 per unit. The product's current sales are 13,400 units and
its break-even sales are 10,720 units. Determine the margin of safety as a percentage of sales.

13,400 – 10,720 2,680

Margin of safety % = = = 20%
13,400 13,400

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Exercise (29):
Sturrock Corporation has provided the following data concerning its only product:
$
Selling price 130 per unit
Current sales 39,400 units
Break-even sales 35,066 units

What is the margin of safety in dollars?

Solution
Margin of safety in units = 39,400 – 35,066 = 4,334 units

Margin of safety in dollars = 4,334 x 130 = 563,420

Exercise (30):
Victorin Corporation has provided the following data concerning its only product:
$
Selling price 210 per unit
Current sales 27,000 units
Break-even sales 21,870 units

What is the margin of safety as a percentage of sales?

Solution
27,000 – 21,800 5,200
Margin of safety % = = = 19.3%
27,000 13,400

Exercise (31):
James Company has a margin of safety percentage of 20% based on its actual sales. The break-even point
is $200,000 and the variable cost are 45% of sales. Given this information, the actual profit is:
A) $27,500 B) $18,000 C) $22,500 D) $22,000

Solution
Sales – 200,000
Margin of safety % = = 20%
Sales
Sales – 200,000 = 20% Sales
Sales – 20% Sales = 200,000
80% Sales = 200,000
200,000
Sales = = 250,000
80%
Actual profit = (Sales - $BE) x CM% = (250,000 – 200,000) x 55% = 27,500

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Exercise (32):
The following is Allison Corporation's contribution format income statement for last month:
Sales 800,000
(-) variable costs (300,000)
Contribution margin (CM) 500,000
(-) fixed costs (400,000)
Net operating income 100,000

The company has no beginning or ending inventories. The company produced and sold 10,000 units last
month.
Required:
1) What is the company's contribution margin ratio?
2) What are the company’s break-even sales in dollars?
3) How many units would the company have to sell to attain target profits of $120,000?
4) What is the company's margin of safety percentage?

Solution
1- The company's contribution margin ratio
Total CM 500,000
CM % = = = 62.5%
Sales 800,000

2. The company’s break-even sales in dollars

Total FC 400,000
BE in dollars = %
= = 640,000
CM 62.5%

3. # of units to attain target profits of $120,000

Total CM 500,000
CM/U = = = 50
# sales 10,000

Total FC + target profit 400,000 + 120,000

# of units to attain target profits of $120,000 = =
CM 50
= 10,400 units

4. The company's margin of safety percentage

800,000 – 640,000 160,000
Margin of safety % = = = 20%
800,000 800,000

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Exercise (33):
The following information pertains to Clove Co.:
$
Budgeted sales 1,000,000
$
Breakeven sales 700,000
$
Budgeted contribution margin 600,000

Clove's margin of safety is:

A) $300,000 B) $400,000 C) $500,000 D) $800,000

Solution
Margin of safety = Sales dollars - Break-even point in sales dollars
= 1,000,000 – 700,000 = 300,000

Exercise (34):
Alex Miller, Inc., sells car batteries to service stations for an average of $30 each. The variable cost of

each battery is $20 and monthly fixed manufacturing costs total $10,000. Other monthly fixed costs of

the company total $8,000.

The breakeven point in batteries is:

A) 1,000 batteries B) 1,500 batteries C) 1,800 batteries D) 800 batteries

The margin of safety, assuming sales total $60,000:

A) $6,000 B) $54,000 C) $114,000 D) $1,800

Exercise (35):
Hunter Corporation sells a product for $180 per unit. The product's current sales are 34,900 units and

its break-even sales are 25,128 units.

What is the margin of safety in dollars?

A) $6,282,000 B) $4,188,000 C) $1,758,960 D) $4,523,040

The margin of safety as a percentage of sales is closest to:

A) 39% B) 28% C) 72% D) 61%

End of Chapter (3)

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 Chapter (4): Profit Planning & Budgeting

Exercise (1):
ABC Company collects 20% of a month's sales in the month of sale, 70% in the month following sale, and
6% in the second month following sale. The remainder is uncollectible. Budgeted sales for the next four
months are:
January February March April
$ $ $ $
Budgeted sales 400,000 600,000 700,000 500,000

Cash collections in April are budgeted to be:

A) $642,000 B) $626,000 C) $640,000 D) $584,000

Solution
April sales ($500,000 × 20%) $
100,000

March sales ($700,000 × 70%) 490,000

February sales ($300,000 × 6%) 36,000

$
Total 626,000

Exercise (2):
ABC Company is estimating the following sales for the first six months of next year:
$
January 500,000
$
February 440,000
$
March 480,000
$
April 600,000
$
May 720,000

Sales at Sioux are normally collected as 60% in the month of sale, 35% in the month following the sale,
and the remaining 5% being uncollectible. Based on this information, how much cash should Sioux expect
to collect during the month of April?
A) $500,800 B) $528,000 C) $540,700 D) $612,000

Solution
April sales ($600,000 × 60%) $
360,000
$ %
March sales ( 480,000 × 35 ) 168,000
$
Total 528,000

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Exercise (3):
On January 1, ABC Company has 16,000 units of Product A on hand. During the year, the company plans
to sell 60,000 units of Product A, and plans to have 13,000 units on hand at year end. How many units of
Product A must be produced during the year?
A) 57,000 B) 63,000 C) 60,000 D) 73,000

Solution
Budgeted sales 60,000

+ Desired ending inventory 13,000

= Total needs 73,000

(-) Beginning inventory (16,000)

= Required production 57,000

Exercise (4):
Betz Company's sales budget shows the following projections for next year:
Sales in units
First Quarter 120,000
Second Quarter 160,000
Third Quarter 90,000
Fourth Quarter 110,000

Inventory at the beginning of the year was 36,000 units. The finished goods inventory at the end of
each quarter is to equal 30% of the next quarter's budgeted unit sales. How many units should be
produced during the first quarter?
A) 48,000 B) 96,000 C) 132,000 D) 144,000

Solution
Budgeted sales 120,000
+ Desired ending inventory (160,000 x 30%) 48,000
= Total needs 168,000
(-) Beginning inventory (36,000)
= Required production 132,000

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Exercise (5):
The following information relates to Minorca Manufacturing Corporation for next quarter:
January February March
Expected sales (in units) 220,000 195,000 200,000
Desired ending inventory (in units) 14,000 15,000 17,500

How many units should Minorca plan on producing for the month of February?
A) 180,000 units B) 194,000 units C) 196,000 units D) 210,000 units

Solution
Budgeted sales 195,000
+ Desired ending inventory 15,000
= Total needs 210,000
(-) Beginning inventory (from Jan.) (14,000)
= Required production 196,000

End of Chapter (4)

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