Cost Volume Profit Analysis
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CPA Auditing and Attestation (AUD) › Cost Volume Profit Analysis
An increase in production levels within a relevant range most likely would result in:
Increasing the total cost
Decreasing the total fixed cost
Decreasing the variable cost per unit
Increasing the variable cost per unit
Explanation
As production levels increase, the total cost would increase as costs are incurred to produce additional output.
ABC company is using cost volume profit analysis to determine service rates for the upcoming year. Projected costs are: Contribution margin per service performed \$1,800, Variable expenses per service performed 1,000, and Total fixed expenses 360,000. Based on these estimates, what is the approximate breakeven point in the number of services performed?
129
450
360
200
Explanation
The formula for breakeven point in number is computed by dividing fixed vests by the contribution margin per unit. This would be 360,000/1,800 = 200.
Several surveys point out that most managers use full product costs, including unit fixed costs and unit variable costs in developing cost-based pricing. Which of the following is least associated with cost-based pricing?
Target pricing
Price justification
Price stability
Fixed cost recovery
Explanation
Target pricing is least associated with cost-based pricing. Target pricing takes the perspective of sales rather than looking internally to costs in order to determine a sales price.
One approach to measuring divisional performance is return on assets. Return on assets is expressed as income:
Divided by the current year's capital expenditures plus cost of capital
Divided by average current assets
Divided by average fixed assets
Divided by average total assets
Explanation
On a divisional level, return on assets is operating income divided by average total assets.
Which of the following ratios would be used to evaluate a company's profitability?
Debt to total assets ratio
Current ratio
Inventory turnover ratio
Gross margin ratio
Explanation
The gross margin ratio describes the ratio of gross margin to sales and serves to evaluate a company's profitability.
Which of the following is not an assumption of CVP analysis?
Volume is the only relevant factor affecting the cost
Costs show greater variability over time
Cost behaviors are expected to change over time
All costs behave in a linear fashion in relation to production volume
Explanation
The correct assumption instead of this would be "Cost behaviors are expected to stay constant over the relevant range of production volume".