3.3 Distinguish among contribution, gross, operating, and net income margins, and apply the CVP model to calculate target net income.
1) An increase in the tax rate will increase the break-even point.
2) Determining the number of units that must be produced in order to generate enough profit to cover total fixed costs is one reason for using a break-even analysis.
3) When making net income evaluations, CVP calculations for target income must be stated in terms of target operating income instead of target net income.
4) If planned net income is $21,000 and the tax rate is 30%, then planned operating income would be $27,300.
5) Target net income is computed by multiplying operating income by one minus the entity's tax rate, or by multiplying operating income by the tax rate, and subtracting that amount from operating income.
6) 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
E) 1,600 units
Use the information below to answer the following question(s).
Brian O'Neil intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the airline carrier for $400 each. The airline intends to reimburse Brian for any unsold ticket packages. The round-trip tickets will be sold for $500 each.
7) How many units will he need to sell in order to break-even assuming Brian incurred $10,000 in expenses to advertise the sale, and there are no other expenses?
A) 20 packages
B) 25 packages
C) 75 packages
D) 100 packages
E) 125 packages
8) What would his break-even point be assuming Brian incurred $31,200 in fixed expenses?
A) 312 packages
B) 232 packages
C) 125 packages
D) 110 packages
E) 100 packages
9) Which of the following statements about using the equation method to determine the break-even point is true?
A) Operating income in the equation is set equal to the target income for the year.
B) Operating income in the equation assumes that fixed costs are nil.
C) Revenue in the equation includes only operating revenues plus fixed costs.
D) The number of units required to reach the break-even point tends to be higher (as it incorporates total costs) using this method than when using the Contribution Margin method.
E) Operating income in the equation is set equal to nil.
10) Which of the following formulae is correct when using the contribution margin method to determine the break-even point?
A) Revenues less operating income equal variable costs plus fixed costs.
B) Unit contribution margin times unit variable cost equals the break-even number of units.
C) Unit contribution margin times the break-even number of units equals total variable costs.
D) Selling price less unit contribution margin equals unit fixed cost for all values below or at the break-even number of units.
E) Unit contribution margin times the break-even number of units equals fixed costs.
