Question 1

On a CVP graph for a profitable company, the total expense line will be steeper than the total revenue line.

Accepted Answer

The total revenue line will be steeper than the total expense line because for a profitable company, revenue increases at a faster rate than expenses as sales volume increases.

Question 2

When expressed on a per unit basis, fixed costs can mislead decision makers into thinking of them as variable costs.

Accepted Answer

Fixed costs do not change with the level of production, but when expressed on a per unit basis, they may appear to vary with the level of production, leading decision makers to incorrectly view them as variable costs.

Question 3

Two companies with the same margin of safety in dollars will also have the same total contribution margin.

Accepted Answer

The margin of safety in dollars is calculated as the difference between actual or projected sales and the break-even sales, while the total contribution margin is calculated as total sales revenue minus total variable costs. Two companies can have the same margin of safety in dollars but different total contribution margins due to differences in their sales revenue, variable costs, or both.

Question 4

For a capital intensive, automated company the break-even point will tend to be higher and the margin of safety will be lower than for a less capital intensive company with the same sales.

Accepted Answer

A capital intensive, automated company would have higher fixed costs associated with the machinery and equipment used in production. This means that the break-even point (the point at which total revenue equals total costs) would be higher because more sales volume is needed to cover these fixed costs. Additionally, the margin of safety (the difference between actual sales and the break-even point) would be lower because there is less flexibility to lower costs in the short term.

Question 5

A shift in the sales mix from high-margin items to low-margin items can cause total profits to decrease even though total sales may increase.

Accepted Answer

This is because low-margin items have a lower profit margin, so selling more of them in place of high-margin items will result in lower overall profits.

Question 6

The break-even point can be determined by simply adding together all of the expenses from the income statement.

Accepted Answer

The break-even point is not determined by simply adding up all expenses, it is calculated by dividing the total fixed costs by the contribution margin per unit.

Question 7

An increase in the number of units sold will decrease a company's break-even point.

Accepted Answer

The break-even point is determined by fixed costs, variable costs per unit, and the selling price per unit. An increase in the number of units sold does not change the break-even point; it helps the company reach or surpass the break-even point faster by increasing revenue.

Question 8

For a given level of sales, a low contribution margin ratio will produce more net operating income than a high contribution margin ratio.

Accepted Answer

A high contribution margin ratio means that a greater percentage of each sale is contributing to covering fixed costs and generating net operating income. Therefore, as sales increase, the net operating income will also increase at a faster rate compared to a low contribution margin ratio.

Question 9

If fixed expenses increase by $10,000 per year, then the sales needed to break even will generally increase by more than $10,000.

Accepted Answer

If fixed expenses increase, the contribution margin (difference between sales and variable expenses) needed to cover those expenses will also increase. This means that the sales needed to break even will generally have to increase by more than the actual increase in fixed expenses.

Question 10

To estimate what the profit will be at various levels of activity, multiply the number of units to be sold above or below the break-even point by the unit contribution margin.

Accepted Answer

This is a correct statement. The formula for calculating profit is (number of units sold - break-even point) * unit contribution margin.

Question 11

The break-even point in units can be obtained by dividing total fixed expenses by the unit contribution margin.

Accepted Answer

This is the correct formula to calculate the break-even point in units.

Question 12

The total volume in sales dollars that would be required to attain a given target profit is determined by dividing the target profit by the contribution margin ratio.

Accepted Answer

The answer of The total volume in sales dollars that...

Question 13

Incremental analysis is an analytical approach that focuses only on those revenues and costs that will not change as a result of a decision.

Accepted Answer

Incremental analysis focuses on both the incremental revenues and costs of a decision, not just those that will not change.

Question 14

In a CVP graph, the anticipated profit or loss at any given level of sales is measured by the vertical distance between the total revenue line (sales) and the total fixed expense line.

Accepted Answer

In a CVP (Cost-Volume-Profit) graph, the anticipated profit or loss at any given level of sales is measured by the vertical distance between the total revenue line and the total cost line, which includes both fixed and variable costs, not just the total fixed expense line.

Question 15

In two companies making the same product and with the same total sales and total expenses, the contribution margin ratio will be lower in the company with a higher proportion of fixed expenses in its cost structure.

Accepted Answer

The contribution margin ratio is calculated as (Sales - Variable Expenses) / Sales, and it is not directly affected by the proportion of fixed expenses in a company's cost structure.

Question 16

A shift in the sales mix from low-margin items to high-margin items will decrease total profits even though total sales increase.

Accepted Answer

This statement contradicts the basic principle of profit margins. A shift towards high-margin items would result in an increase in profit margins and therefore, an increase in total profits.

Question 17

A decrease in the number of units sold will decrease the break-even point.

Accepted Answer

The break-even point is determined by fixed costs, variable costs per unit, and the selling price per unit. A decrease in the number of units sold affects total revenue and profit, but not the break-even point itself, which is the level of sales at which total costs equal total revenue.

Question 18

The smaller the contribution margin ratio, the smaller the amount of sales required to cover a given amount of fixed expenses.

Accepted Answer

The smaller the contribution margin ratio, the larger the amount of sales required to cover a given amount of fixed expenses. This is because a smaller contribution margin means that less revenue from each sale is available to cover fixed expenses.

Question 19

If the variable expense per unit decreases, and all other factors remain the same, the contribution margin ratio will increase.

Accepted Answer

This is because the contribution margin is calculated as the selling price per unit minus the variable expense per unit. If the variable expense per unit decreases, the contribution margin per unit will increase, leading to a higher contribution margin ratio.

Question 20

In a CVP graph (sometimes called a break-even chart), unit volume is represented on the horizontal (X) axis and dollars on the vertical (Y) axis.

Accepted Answer

This statement accurately describes a CVP graph.

Quiz 2: Costvolumeprofit Relationships