Chap 012

Chapter 12 - Financial and Cost-Volume-Profit Models
CHAPTER 12
Financial and Cost-Volume-Profit Models
Chapter Outline
A. Cost Management Challenges — Chapter 12 offers three cost management challenges.
1. How can organizations benefit from using a financial model?
2. Can financial models define future risks so that managers at least know what the
uncertainties are?
3. Should organizations always try to maximize revenues or even the sales of products and
services with the most throughput, contribution margin, or profit per unit? Are resource
constraint an issue?
B. Learning Objectives — This chapter has seven learning objectives.
1. Design financial models to match strategic and operational decisions, such as profit
planning or optimal use of a scarce resource.
2. Build a basic cost-volume-profit (CVP) financial model.
3. Build a computerized financial planning model.
4. Build a financial model that reflects the effects of taxes, multiple products, and multiple
cost drivers.
5. Apply scenario and sensitivity analyses to model the risk of decisions.
6. Manage scarce resources
7. Apply the Theory of Constraints to manage scarce resources (Appendix A)
8. Use linear programming to model decisions about the use of multiple scarce resources
(Appendix B).
C. Financial models are representations of reality in the business world. A model allows one to see
how something is supposed to work. A financial model allows an organization to test the
interaction of economic variables in a variety of settings. Financial models require that analysts
develop a set of equations that represent a company’s operating and financial relationships. These
may include things like the relation of sales to variable costs, inventory turnover, and the relative
proportions of various products sold. Once a financial model is developed, it can be used to
explore different combinations of the variables that interact with each other to see what outcomes
to expect given different scenarios.
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Financial models offer several benefits to users. Once the model is developed, users can
concentrate on business analysis instead of number crunching. It gives managers insight into
possible business outcomes without the risk of trying them first. It is, therefore, possible to
identify bad business decisions ahead of time.
On a cautionary note, models are only as good as the information that goes into them. Faulty
assumptions in building a model will lead to faulty predictions and bad business decisions.
D. One model that has proven to be especially useful is the Cost-volume-profit (CVP) model. This
model shows the effects of volume changes on an organization’s costs, revenues, and income.
This basic model combines four important variables — volume of sales, costs, revenue, and
profits. The basic model can be extended to assess the impact of price, cost, and volume changes,
along with changes in product mix and income taxes.
Although the model is called cost-volume-profit, it can be used by non-profit organizations as
well. Such organizations perform analyses to assure that they spend only the funds they have.
This is a special type of CVP analysis called breakeven analysis.
1. The breakeven point is the volume of activity that generates just enough revenue to cover
all costs for an organization. It is the level of sales volume where an organization is not
making any profit, but they are not losing money either.
a. The breakeven point is best understood if costs and revenues are expressed in a
manner that departs from the traditional presentation of costs and revenues. The
format that aids in understanding how to achieve the breakeven point is called the
contribution margin (CM) format. This type of profit-reporting approach splits
costs into two categories — fixed costs and variable costs.
b. The CM format of the income statement is shown in brief form as follows:
Sales revenue
Less Total Variable Cost
= Total contribution margin
Less total fixed costs
= Operating income
Less income taxes, other non-operating income
= Net income
This format is useful because variable costs change with sales activity. Since this
is true, sales revenue, variable costs, and total contribution can all be expressed in
terms of volume times a dollar amount per unit sold. For instance, suppose a
product can be sold for $40. Variable cost for each unit is $25. This leaves a
contribution per unit of $15 ($40 - $25). For every unit sold, $15 in contribution
margin is generated. The contribution margin can be used first to cover fixed
costs, and then, what is left after covering fixed costs and income taxes, is net
income.
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c. Calculation of the breakeven point can be accomplished using the contribution-

margin approach. In order to use this approach, the CM per unit must be known,
and estimated fixed costs must be known. Suppose in the example given above,
the CM of $15 per unit must be used to cover $45,000 in fixed costs. Then,
$45,000/$15 = 3,000 units. To check the accuracy of this, multiply 3,000 units
times the $15 CM, to get $45,000 in contribution margin. This is the breakeven
point. To get the breakeven in dollars, we must use contribution margin ratio
(CM/Sales) to determine the breakeven point.
d. Another way to calculate the breakeven point is to use the equation approach. To
see how the equation approach is derived, look at the equation showing how
operating income is obtained:
1) Sales revenue – Total cost = Operating income. Total cost can be split
into fixed and variable costs:
2) Sales revenue – Variable cost – Fixed cost = Operating income. Sales
revenue and variable costs can be expressed differently, based on number
of units sold:
3) (Selling price per unit * sales volume) – (Variable cost per unit * sales
volume) – Fixed costs = Operating income. Since, at the breakeven point,
Operating income is zero, the equation can be written as:
4) (Selling price per unit * sales volume) – (Variable cost per unit * sales
volume) – Fixed costs = $0. Next, rearrange the equation by adding
Fixed costs to both sides of the equation, to get:
5) (Selling price * sales volume) – (Variable cost per unit * sales volume) =
Fixed costs. Rearrange the left-hand-side of the equation, combining the
sales volume terms, to get:
6) (Selling price - Variable cost per unit) * Sales volume = Fixed costs.
Finally, to get Sales volume on one side of the equation by itself, divide
both sides by (Selling price – Variable cost):
7) Sales volume = Fixed costs/(Selling price – Variable cost). This gives
you the sales volume at the breakeven point.
Use the example given above to see if this approach works. Sales volume =
$45,000/($40 - $25) = $45,000/$15 = 3,000 units, which is the same result
obtained before.
e. The CVP model can also be graphed. Graphing the model helps managers see
what it will take to break even, and then they can see what it takes to make profit.
It also shows how much sales would have to decline before an already profitable
business begins to lose money. Two graphs are typically used. CVP graph that
graphs the lines for sales, variable costs, and fixed costs, and shows the point of
intersect (breakeven point), and profit-volume graph that shows volume and the
range of profit and loss as well as the break-even point.
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2. Organizations in business to earn profits want to perform beyond the breakeven point.
CVP analysis can be used to estimate the sales volume needed to attain target amounts of
profit. If the target amount of operating income is known, then extending the CVP model
beyond the breakeven point is fairly simple. All that is required is that target operating
income be added to estimated fixed costs. In the example given above, suppose the
organization wanted to earn operating income of $30,000. In order to determine the sales
volume needed to achieve this income, use the equation form of the CM model:
Sales volume = Fixed costs/(Selling price – Variable cost). This model needs to be
expanded to include operating income of $30,000. Then, Sales volume = (Fixed costs +
Target operating income)/(Selling price – Variable cost). Using the amounts given before,
Sales volume = ($45,000 + $30,000)/$15 = 5,000 units.
3. Organizations making profit must also pay income taxes. A business only gets to keep
income after taxes (net income). Thus, the CVP analysis is more informative if it shows
what it will take to generate a target amount of net income. In order to calculate the sales
volume needed to achieve a specified amount of net income, a tax rate as a percentage of
operating income is assumed. Mathematically, the amount of net income can be
expressed as a percentage of operating income. Look at the following equations to see
why this is true. Let net income be represented by after-tax income and before-tax
income represent operating income. Let t equal the tax rate.
1) After-tax income = Before-tax income – income taxes. The amount of

income tax is Before-tax income * t. Restated:
2) After-tax income = Before-tax income – (Before-tax income * t).
Rearrange the right-hand-side of the equation, to get:
3) After-tax income = Before-tax income * (1 – t). Divide both sides of the
equation by (1 – t) to get:
4) After-tax income/(1 – t) = Before-tax income.
Since organizations may establish target net income, now it is a straightforward step to
calculate the amount of sales volume needed to achieve some target operating income as
well. Extending the earlier example, suppose the tax rate is 20% and target operating
income is, as before, $30,000. Then net income is 1 – the tax rate of 20%, or 80% of
$30,000 = $24,000. Suppose the net income of $24,000 is the stated target and target
operating income is not known. It can be obtained by using the rearranged equation
above: After-tax income/(1 – t) = Before-tax income - $24,000/(1 - .20) = Before-tax
income = $24,000/.80 = $30,000. Then, the sales volume needed could be determined as
before.
4. The variables can be revised, manipulated, and rearranged, to see what the profit
outcomes would be if assumptions about price, volume, and costs were changed. These
changes are best accomplished using computer software and are referred to collectively
as sensitivity analysis. Sensitivity analysis shows how the outcome of a decision process
changes as one or more assumptions change.
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5. A concept related to CVP is operating leverage (OL). OL reflects the risk of missing sales
targets and is measured by the ratio of contribution margin to operating income.
Companies with high fixed costs are riskier but more profitable at higher volumes of
sales. The concepts is called operating leverage because a change in percentage in sales
times the OL signifies the amount of change in income. Assume that company A has a
contribution margin of $20,000 and an operating income of $10,000 resulting in an OL of
2. Company B has a contribution margin of $40,000 and the same operating income
resulting in an OL of 4. Now if the sales of both companies increase by 20%, profits of
company A will increase by 2 * 20% or 40% while profits of company B will increase by
4 * 20% or 80%. This is the power of the operating leverage. Note that the OL does not
remain constant. As sales change so does profit and the degree of OL.
6. CVP analysis, as described so far, is useful for a very simple business with only one
product and a simple cost structure. Most organizations have many products, adding
complexity to the CVP analysis. The CVP model can quickly become a modeling tool
that can only be used via computer software. A simple example with two or three
products can be used to illustrate how a multiple-product CVP model works. In this
simple example, another simplifying assumption is made. It is assumed that the relative
proportions of each type of product sold remains the same.
a. When two or more products are sold, and the sales mix is held constant, a
weighted average unit contribution margin (WAUCM) can be computed. The best
way to think about the WAUCM is to think of a “unit” as a bundle, consisting of
the number of items in each bundle, for each product. For instance, if the sales
mix for a beauty salon is five trims for every perm, then one “unit” will be five
trims and one perm. The contribution margin will be the one that is generated by
that bundle of products.
b. When calculating the breakeven point or computing target income, the WAUCM
must be revised any time the sales mix is revised.
c. CVP uses the idea of sales mix in calculating the breakeven point and beyond the
breakeven point. The sales mix assumptions are also used for performance
evaluation and to assess profitability and for decision making related to which
products to sell.
d. When computing breakeven in dollars in a multi-product situation, we should

take the sales weight in dollars for each product as a percentage of total times its
contribution margin ratio to arrive at a weighted average contribution margin
ratio. Alternatively, we should compute the weighted average contribution
margin ratio by dividing total contribution by total sales for the mix of the
products provided at a given product mix level.
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7. There are limitations in the usefulness of the CVP model. First, the sales mix must be
held constant in order to calculate a breakeven point or to estimate sales volume needed
to achieve some target income amount. This is usually not a realistic assumption. Other
variables are assumed to remain constant — costs, efficiency of operations, technology in
operations, and cost characteristics. This assumption is also not a realistic one. We also
start with a given sales price. A third assumption is that there is a linear relationship
between revenues and costs, thus ignoring quantity discounts and other effects that
threaten the accuracy of the model’s results. Perhaps the biggest criticism of the CVP
model is the use of one activity — units sold — as the cost/activity driver. The CVP
model ignores market conditions, such as product demand, competitive pricing, sales
resulting in pricing changes, quality issues, general economic conditions, inflation,
among other variables. Some argue that CVP is too simplistic to be useful as a
management tool. Others argue that the model needs to be extended to an activities-based
model.
a. CVP and ABC together can provide managers with a comprehensive estimation
model. By using an ABC approach and taking into account that costs can be
categorized as unit, batch, product, customer, or facility-level costs, the CVP
model needs to be modified so that the costs are characterized differently than
simply fixed or variable. Total costs should be categorized as: (Unit variable cost
* number of units) + (Batch costs * number of batches) + (Product cost *number
of products) + (Customer cost * number of customer orders) + (Facility costs *
facility cost driver). This characterization of costs takes some costs that might
have been treated as fixed before and now treats them as variable, but the
variability is based on activity other than number of units sold.
b. By using account analysis and multiple regression (see Chapter 11), a CVP
model can be extended to incorporate multiple layers of cost drivers and activity.
The extension of the simple CVP model provides many benefits. The main
benefit is that it provides much better information regarding what must be done
to ensure profitability. It also clarifies different costs that exist.
c. Although the CVP model is much more complex when adapted to allow
inclusion of multiple cost drivers, it is easier to perform sensitivity analysis via
computer software. Once the time and money are invested in an intricate system
like the one described, it is to the advantage of the organization to use the model
as much as possible in order to evaluate performance and examine profitability
options.
E. Excel worksheet is very conducive to creating computer models to solve CVP scenarios together
with sensitivity analysis. It is important to use cells and cell references so that changing some
assumptions would automatically result in recalculating the desired numbers. Target profit, target
selling price, taxes, and costs can be all incorporated into the model. A sales mix or a product mix
of different products with specific proportion of each can also be included into the model for a
multi-product situation. In addition, ABC models can be incorporated into the equation to
account for a new combination of factors that show variability by unit, by batch, by product, or
by customer type.
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F. The CVP model is used primarily for short-term decision making. Four types of decisions for
which the CVP model might provide helpful information are (1) the make-or-buy decision, (2)
adding or dropping a business unit (e.g., a product line), (3) optimal use of scarce resources, and
(4) accepting special orders. The question of the optimal use of scarce resources is discussed in
this chapter.
G. Choosing which goods and services to produce and sell is a common managerial decision.
Successful organizations are likely to be confronted with limited capacity, at least in the short run.
These limitations are called capacity constraints. Examples of capacity constraints include
shortage of skilled tax accountants during tax season; not enough computer programmers to write
code for new video games needed for holiday sales; or too few cooks at a large restaurant. Ideally,
managers faced with capacity constraints should direct resources needed to alleviate the
constraint before expending resources on less constrained activities. Sometimes it is not possible
to correct the capacity constraint problem soon enough to avoid choosing between profit-making
alternatives.
1. When an organization is faced with choosing among alternative profitable activities, the
contribution margins generated by each alternative should be compared. The opportunity
that provides the highest contribution margin per unit of the scarce resource is the one
that should be chosen.
2. Although managers might have to resolve capacity constraints related to one bottleneck
resource, it is often the case that two or more capacity constraints must be dealt with at
the same time. When this is the case, the analysis of which activity or group of activities
is optimal can be completed using a mathematical model called “linear programming.”
Linear programming is a mathematical model used to maximize profits or minimize
costs.
H. One of the most common methods of assessing risk is sensitivity analysis. It tests a financial
planning model for changes in outcomes caused by changes in each of the model’s parameters.
1. The what if analysis could be in terms of impact on profit with different sales volumes,
sales prices, fixed costs, or variable costs, and any combination of these variables.
2. Another example could be a “scenario analysis” where profit levels will be explored under
best, worst, and most likely cases.
I. Linear programming can also be used to model decisions about the use of multiple scarce
resources.
1. Linear programming shows how best to allocate multiple scarce resources among
alternative courses of action in the short run when capacity cannot be increased. The
objective could be maximization of sales or profits or minimization of costs.
a. Objective function is a mathematical relation of inputs to outputs to be

maximized or minimized.
b. Feasible solution space is the combination of input and output values that satisfy
the constraints.
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c. Optimum point is the set of inputs and outputs in the feasible solution space that
maximizes or minimizes the objective function.
2. Linear programming model requires transforming data into equation form. If the
objective is maximization of contribution margin (CM) of a three-item product mix with
certain given contribution margins, the model could say:
Maximize: $A + $B + $C
Subject to certain constraints, such as
Direct Material ?A + ?B + ?C <= ###
Direct Labor ?A + ?B + ?C <= ###
Sales of A should be >= ?
Sales of B should be >= ?
a. After entering the data into an Excel worksheet, you can go tools – add-in –
solver and call in the required cells to solve a linear programming problem.
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Chapter 12 - Problem 1
LO: 4
Building a financial model that reflects the effects of taxes, multiple products, and
multiple cost drivers.
Time needed: 45 minutes
XYZ Company has three products X, Y, and Z. X sells for $20 with a variable cost of $8,
Y sells for $30 with a variable cost of $21, Z sells for $50 with a variable cost of $40.
Fixed costs amount to $214,000. Furthermore, assume that for every 5 units of X that are
sold, the company sells 3 units of Y and 2 units of Z.
Required: Use an Excel worksheet
1) Determine break-even in units and dollars of each product.
2) Assuming a desired profit of $107,000, how much of each product should be sold?
3) Assuming a desired net profit of $149,800 and a tax rate of 30%, how much of each
product should be sold?
4) At a targeted profit level of $53,500 (no taxes), by how much would profit increase if
sales increase by 80%? Show the percentage and the amount.
Solution:
1) X Y Z
Selling price 20 30 50
Variable costs 8 21 40
Contribution margin 12 9 10
Sales mix 5 3 2
Fixed costs 214000
Weighted average CM 60 27 20 107
Breakeven in units 10000 6000 4000 2000
Breakeven in dollars 200000 180000 200000 580000
CM = FC at BE 120000 54000 40000 214000
2)
Target profit 107000
Cost and profit to be covered 321000
Required units 15000 9000 6000 3000
Sales required in $ 300000 270000 300000 870000
3)
Net income 149800
Tax rate 0.3
Income before tax 214000
FC and profit to be covered 428000
Sales required 20000 12000 8000 4000
4)
Operating income 53500
FC and profit to be covered 267500
Required units 12500 7500 5000 2500
Operating leverage 4
Sales increase 80%
Profit increase 320%
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Problem 2
LO: 5
Sensitivity analysis
Arman Company has a total of $250,000 in fixed manufacturing and $150,000 in fixed administrative
costs per period. The product sells for $20 and has a manufacturing variable cost of $12 and variable
selling expense of $2 per unit.
Required:
a) Determine the breakeven point in units and in dollars.
b) What would be the breakeven point in units and dollars if fixed manufacturing cost increase by
$40,000?
c) What would be the BE if fixed administrative costs decrease by $80,000?
d) What would be the BE if selling price increase by $4 a unit?
e) What would be the BE if variable manufacturing costs increase by one dollar?
f) What would be the BE if variable selling expense decrease by one dollar?
g) What would be the BE if the tax rate is at 30% of net income?
Answer:
Problem 3
LO: 6 & 7
Managing scarce resources and the theory of constraints
Product X requires 2 hours of labor time, ½ hour of machine time, and 3 lbs of material whereas,
Product Y requires 1 ½ hour of labor time, one hour of machine time, and 4 lbs of material.
X sells for $125 and Y sells for $179 a unit. Labor cost is $12 an hour; machine time costs $20
an hour, and material costs $16 a lb. Determine
a) Optimal output where demand is unlimited. Production capacity is 1500 of each product
b) Optimal output where demand for X and Y is one thousand units and we have a labor time
constraint of 3,000 hours.
c) Optimal output where demand is 1,000 units for each and machine time available is only 1,200
hours.
d) Optimal output where demand is 1,000 units for each and material available is only 4,900 lbs.
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Solution:
Problem 4
LO: 4
Multiple products breakeven model
Estimated time: 15 minutes
Gissue Bake Shop makes two kinds of pastries. Pastry X costs $12 and sells for $20. Pastry B costs $7
and sells for $10 each. The above costs are variable costs only. The shop’s fixed costs amount to $3,923.
Current sales volume amounts to 300 units of A and 700 units of B. The same mix will hold in the future.
Determine a) breakeven point, b) sales needed if the company expects a periodic profit of $2,000, c) sales
needed if the company expects a net profit of $2,000 with a tax rate of 30%.
Solution:
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Sample Quiz
1. AAA Company produced a product which had a selling price of $20 and a variable cost which
amounted to 60% of sales. Given a fixed cost of $60,000, the breakeven sales will be
a. 5,000 units
b. 5,500 units
c. 6,000 units
d. 7,000 units
e. 7,500 units
Answer: e Learning Objective: 2

60,000 / 8 = 7,500; CM = 20 – (20 * .60) = 8
amounted to 40% of sales. The company wants a profit before tax of $15,000. The tax rate is 20%
and fixed costs amount to $60,000. AAA must sell
a. 6,250
b. 7,396
c. 9,375
d. 9,844
e. None of the above.
Answer: a Learning Objective: 4

(60,000 + 15,000) / 12 = 6,250 units
amounted to 60% of sales. The company wants a profit after tax of $15,000. The tax rate is 20% and
fixed costs amount to $60,000. AAA must sell
a. 6,250
b. 7,396
c. 9,375
d. 9,844
Answer: d Learning Objective: 4

15,000 / (1 - .20) = 18750; (60,000 + 18,750) / 8 = 9,844
4. AAA currently has a profit of $15,000 at a sales volume of 6250 and a variable cost of $8 and a
selling price of $20. If variable costs increase to $9, by how much can the fixed costs change to still
maintain the same profit?
a. $6,000 decrease
b. $6,250 decrease
c. $6,000 increase
d. $6,250 increase
Answer: b Learning Objective: 1
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5. AAA currently has a profit of $15,000 at a sales volume of 9375 units and a fixed cost which amounts
to $65,625 and a selling price of $20 per unit. Variable cost per unit should be
a. $12.6
b. $12.0
c. $11.4
d. $11.0
Answer: c Learning Objective: 2
6. ABC Company sells three products with exactly the same price of $20 a unit. However, A’s
contribution margin amounts to 40%, B’s at 50%, and C’s at 60% of sales. Sales mix for A, B, and C
is at 500, 1500, and 3000 units respectively. Fixed costs amount to $16,500. Breakeven sales for B
should be
a. 450
b. 600
c. 750
d. 1500

Sales mix: 10%, 30%, and 60% with CM of 8, 10, and $12 respectively.
(10% * 8) + (30% * 10) + (60% * 12) = 11; 16,500 / 11 = 1,500; 1,500 * 30% = 450
7. ABC Company sells three products with exactly the same price of $20 a unit. However, A’s variable
cost is at 40%, B’s at 50%, and C’s at 60%. Fixed costs amount to $18,000. An additional $9,000
needs to be spent on advertising to boost sales. Sales mix is at 500, 1500, and 3000 units for A, B, and
C respectively. Sales in dollars for C at breakeven amounts to
a. $18,000
b. $24,000
c. $36,000
d. $45,000

(10% * 12) + (30% * 10) + (60% * 8) = 9; 27,000 / 9 = 3,000; 3,000 * 60% * 20 = 36,000
8. ABC’s sales mix has drastically changed due to market conditions to 3000, 1500, and 500 units for A,
B, and C respectively. Fixed costs have increased to $22,000 per period. The selling price is at $20 a
unit for all products with a variable cost of 40%, 50%, and 60% for A, B, and C respectively.
Breakeven units for A will be
a. 300
b. 600
c. 900
d. 1,200
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9. Omid Company produces and sells two products — M and N — for $29 and $19 a unit respectively.
Variable costs amount to $14 for M and $12 for N per unit. It takes 1½ hours to make one unit of M
and ½ hour to make one unit of N. Total manpower available is 1300 hours and maximum demand for
is 1,800 units of M and 1,700 units of N. The optimum production of M to maximize profit should be
a. 300
b. 900
c. 1700
d. 1800
10. Honda Company has decided that a fair selling price for its model 2003 Accord is $18,960 per
vehicle. The dealer markup is 20% from the net manufacturer’s price. The freight to the dealer’s
shops, which is paid by the manufacturer, comes to $450 per vehicle. An Accord inclusive of freight
presents costs the company in the neighborhood of $15,950. Honda’s cost to manufacture per unit
should be reduced by _______ in order to break even.
a. $150
b. $600
c. $782
d. $1,232
11. Shahnaz has three products X, Y, Z with a throughput margin of $12, $18, and $24 respectively. It
takes one hour to produce one unit of X, two hours to produce one unit of Y, and three hours to
produce one unit of Z. If a total of 3000 hours are available, how much of which product(s) should be
made?
3,000 units of X
1,500 units of Y
1,000 units of Z
1000 units of X and 1,000 units of Y
500 units of X, 500 units of Y, and 500 units of Z.
produce one unit of Z. Given a demand of 900 units for each product, how much of each product
should be made?
900 of each
900 of X, 750 of Y, and 200 of Z
800 of X, 800 of Y, and 200 of Z
900 units of X, 900 units of Y, and 100 units of Z
none of the above.
Answer: d Learning Objective: 6
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produce one unit of Z. Given a demand of 800 units for each product, the optimal throughput margin
will amount to:
$27,500
$28,800
$29,200
$31,600
$32,750
14. Based on the data available, there is a 30% chance of selling 12,000 units of X at $15 a unit or 50%
chance of selling 10,000 units at $16 a unit or 20% chance of selling 9,000 units at $18 a unit. The
weighed average probability of sales amounts to
$184,600
$168,400
$166,400
$164,600
none of the above
Answer: c Learning objective: 5
15. Ryan Enterprises had sales amounting to $350,000, 40% of which was for variable costs with a profit
amounting to $20,000. The company has an operating leverage of
9 times
8 times
7 times
6 times
5 times
Answer: a Learning objective: 2
amounting to $20,000. If sales increase by 40%, profit will increase by
40%
120%
240%
300%
360%
Answer: e Learning objective: 2
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amounting to $20,000. If sales increase by 20%, profit will amount to
$36,000
$36,000
$56,000
$66,000
none of the above
18. Omid Printing expects its fixed costs to amount to $180,000. The company has an average selling
price of $40 a unit with a variable cost of 60% and desired profit of 10% of sales. The company’s
sales should amount to ___________ to meet its objectives:
$500,000
$600,000
$700,000
$800,000
$900,000
Answer: b Learning objective: 4
19. The theory of constraint

is the constraint or constraining factor
is a process or resource in a system that limits the capacity of the system
seeks to improve productive processes by focusing on the constraining factors
a and b
b and c
20. Constraint
is the constraint or constraining factor
is a process or resource in a system that limits the capacity of the system
seeks to improve productive processes by focusing on the constraining factors
a and b
b and c
Answer: b Learning objective: 7
17. Honda Company has decided that a fair selling price for its model 2000 Accords is $18,960 per
vehicle. The dealer’s margin is 20% from the suggested selling price. If Honda wants a profit of 10%
on its net invoiced price, its cost per vehicle should be
a. $13,651
b. $14,220
c. $16,853
d. $17,556
12-16
18. XY Company’s product mix includes $720,000 in sale of X and $640,000 in sale of Y. X’s
contribution margin is 60% and Y’s is 40% of sales. Fixed costs amount to $505,880. X’s sale at
breakeven should amount to
a. $640,000
b. $720,000
c. $529,400
d. $470,600
19. XY Company’s product mix includes $720,000 in sale of X and $640,000 in sale of Y. X’s
contribution margin is 60% and Y’s is 40% of sales. Fixed costs amount to $505,880. Weighted
average contribution margin ratio for Y amounts to
a. .31764
b. .18824
c. .50588
d. .40000
20. Value engineering may involve

a. benchmarking.
b. activity-based costing.
c. elimination of non-value-added costs.
d. tearing apart competitive products for analysis.
e. All of the above.
21. Sensitivity analysis answers what if questions such as possible impact of changes in
a. sales prices
b. variable costs
c. fixed costs
d. sales mix
e. all of the above.
12-17

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Chapter 12 - Financial and Cost-Volume-Profit Models

A. Cost Management Challenges — Chapter 12 offers three cost management challenges.

1. How can organizations benefit from using a financial model?

B. Learning Objectives — This chapter has seven learning objectives.

2. Build a basic cost-volume-profit (CVP) financial model.

3. Build a computerized financial planning model.

5. Apply scenario and sensitivity analyses to model the risk of decisions.

6. Manage scarce resources

7. Apply the Theory of Constraints to manage scarce resources (Appendix A)

b. The CM format of the income statement is shown in brief form as follows:

c. Calculation of the breakeven point can be accomplished using the contribution-

1) After-tax income = Before-tax income – income taxes. The amount of

d. When computing breakeven in dollars in a multi-product situation, we should

a. Objective function is a mathematical relation of inputs to outputs to be

Answer: e Learning Objective: 2

Answer: a Learning Objective: 4

Answer: d Learning Objective: 4

Answer: b Learning Objective: 1

Answer: c Learning Objective: 2

Answer: a Learning Objective: 4

Answer: c Learning Objective: 4

Answer: b Learning Objective: 4

Answer: a Learning Objective: 6

Answer: b Learning Objective: 4

Answer: a Learning Objective: 6

Answer: d Learning Objective: 6

Answer: b Learning Objective: 6

Answer: c Learning objective: 5

Answer: a Learning objective: 2

Answer: e Learning objective: 2

Answer: c Learning objective: 2

Answer: b Learning objective: 4

19. The theory of constraint

Answer: c Learning objective: 7

Answer: b Learning objective: 7

Answer: a Learning Objective: 4

Answer: b Learning Objective: 2

20. Value engineering may involve

Answer: e Learning Objective: 4

Answer: e Learning Objective: 5

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