1. If Fixed Cost is ?40,000 and Contribution per Unit is ?10, the Break-Even Point (in units) is:
4,000 units
40,000 units
400 units
10,000 units
Explanation:
BEP (Units) = Fixed Cost / Contribution per Unit = 40,000 / 10 = 4,000 units.
2. Profit Volume (PV) Ratio is calculated as:
Sales / Contribution
Fixed Cost / Sales
Contribution / Sales * 100
Profit / Sales
Explanation:
PV Ratio indicates the rate at which profit is earned. Contribution = Sales - Variable Cost.
3. "Margin of Safety" is the difference between:
Budgeted Sales and Actual Sales.
Fixed Cost and Variable Cost.
Actual Sales and Break-Even Sales.
Total Sales and Variable Cost.
Explanation:
Margin of Safety indicates how much sales can fall before the company starts making a loss. Higher MoS means lower risk.
4. When there is a "Limiting Factor" (Key Factor) like shortage of raw material, product mix decision should be based on:
Maximum Contribution per Unit.
Maximum Sales volume.
Maximum Contribution per unit of the Limiting Factor.
Maximum Profit per Unit.
Explanation:
To maximize profit with scarce resources, a firm must prioritize products that yield the highest contribution per unit of the scarce resource (e.g., Contribution per kg of material).
5. A firm should shut down its operations in the short run if the Selling Price cannot even cover:
Variable Cost.
Total Cost.
Administrative Cost.
Total Fixed Cost.
Explanation:
In the short run, a firm can ignore fixed costs (sunk). But if revenue < variable cost, every unit sold increases the loss. Hence, the Shutdown Point is where Price = Average Variable Cost.
6. Which of the following equations represents "Contribution"?
Variable Cost + Profit
Sales - Total Cost
Sales - Fixed Cost
Fixed Cost + Profit
Explanation:
Contribution = Sales - Variable Cost. Alternatively, Contribution = Fixed Cost + Profit (since Sales - VC - FC = Profit).
7. In a "Make or Buy" decision, which cost is relevant for comparison with the external purchase price?
Variable (Marginal) Cost only.
Sunk Cost.
Total Cost (Fixed + Variable).
Fixed Cost only.
Explanation:
Fixed costs will be incurred regardless of the decision (unless specific avoidable fixed costs exist). Therefore, the relevant cost to manufacture is only the Marginal/Variable cost.
8. In a Break-Even Chart, the "Angle of Incidence" indicates:
Variable Cost.
Margin of Safety.
Fixed Cost.
The rate at which profit is earned once the BEP is crossed.
Explanation:
A wider Angle of Incidence means higher profitability (profit grows fast as sales increase). A narrow angle suggests low profitability.
9. The "Cost Indifference Point" is the level of output where:
The Total Costs of two alternatives are equal.
Profit is maximum.
Total Sales equal Total Cost.
Total Cost is minimum.
Explanation:
The Cost Indifference Point is the volume of production at which total costs under two different methods (e.g., Machine A vs Machine B) are identical. Below this point, the option with lower fixed cost is preferred; above it, the option with lower variable cost is preferred.
10. Which of the following will INCREASE the Profit Volume (P/V) Ratio?
Decrease in Variable Cost per unit.
Increase in Fixed Cost.
Decrease in Selling Price per unit.
Increase in Variable Cost per unit.
Explanation:
P/V Ratio = (Sales - Variable Cost) / Sales. Reducing the Variable Cost increases the Contribution margin, thereby increasing the P/V Ratio. Fixed costs do not affect P/V ratio.
11. To calculate the Sales volume required to achieve a "Target Profit", the formula is:
Fixed Cost / PV Ratio
(Fixed Cost - Target Profit) / PV Ratio
Target Profit / PV Ratio
(Fixed Cost + Target Profit) / PV Ratio
Explanation:
Contribution must cover both Fixed Cost and the desired Target Profit. Dividing the total required Contribution (FC + Profit) by the PV ratio gives the required Sales volume.
12. The sum of the P/V Ratio and the Variable Cost Ratio is always equal to:
Fixed Cost
0
1 (or 100%)
Profit
Explanation:
Sales = Variable Cost + Contribution. Dividing by Sales: 1 = (VC/Sales) + (Contribution/Sales). Thus, VC Ratio + P/V Ratio = 1.
13. If the Fixed Cost increases while Variable Cost per unit and Selling Price remain constant, the Break-Even Point will:
Decrease.
Increase.
Remain unchanged.
Become zero.
Explanation:
BEP = Fixed Cost / Contribution per unit. Since the numerator (Fixed Cost) increases and the denominator (Contribution) stays same, the BEP increases (you need to sell more to cover higher fixed costs).
14. If Sales are ?1,00,000, Profit is ?10,000, and Fixed Cost is ?30,000, what is the P/V Ratio?
Explanation:
Contribution = Fixed Cost + Profit = 30,000 + 10,000 = 40,000. P/V Ratio = (Contribution / Sales) * 100 = (40,000 / 1,00,000) * 100 = 40%.
15. If Margin of Safety is 20% and P/V Ratio is 40%, the Profit percentage on Sales is:
Explanation:
Profit % = Margin of Safety % * P/V Ratio. 20% * 40% = 0.20 * 0.40 = 0.08 or 8%.
16. A business is making a loss. To reach the Break-Even Point, it must:
Decrease Selling Price.
Increase Variable Costs.
Decrease Fixed Costs or Increase Sales.
Increase Contribution equal to the Loss amount.
Explanation:
To stop loss (reach BEP), revenue must cover total costs. This can be done by increasing sales volume/price or reducing costs (Fixed or Variable).