Question 1

When performing CVP analysis for a multi-product organization:

Accepted Answer

The answer of When performing CVP analysis for a multi-product...

Question 2

A cost function is used in CVP analysis to predict:

Accepted Answer

A cost function is used in CVP analysis to predict the total revenue at the breakeven point.

Question 3

Salmon Co. is deciding between two compensation plans. In Plan A, salaries are $100,000 and the commission is $2 per unit. In Plan B, salaries are $40,000 and the commission is $4 per unit.
At what level of sales, in units, is Salmon indifferent between the two compensation plans?

Accepted Answer

To find the indifference point, set the total compensation of both plans equal: $100,000 + $2x = $40,000 + $4x. Solving for x gives x = 30,000 units.

Question 4

If the sales mix changes:

Accepted Answer

The sales mix affects the contribution margin ratio because each product has a different contribution margin. As the mix changes, the overall contribution margin ratio will also change. This can affect profitability and pricing decisions. The fixed costs and variable costs will remain the same regardless of the sales mix.

Question 5

Susan Co. has total variable costs equal to 40% of sales. Fixed costs are $120,000. What is the breakeven point in revenues?

Accepted Answer

The breakeven point in revenues can be calculated using the formula:

Breakeven point = Fixed costs / (1 - Variable costs as a percentage of sales)

Plugging in the given values, we get:

Breakeven point = $120,000 / (1 - 0.40) = $200,000

Question 6

All of the following data can be used to develop CVP analysis except:

Accepted Answer

Historical cost information, data reflecting anticipated future changes, and data found within the accounting records are all relevant inputs for developing CVP analysis. However, irrelevant costs should be excluded from the analysis as they do not impact the decision-making process.

Question 7

Ramser Co. has total variable costs equal to 40% of sales. Fixed costs are $120,000. What is the breakeven point in units?

Accepted Answer

The breakeven point in units cannot be determined without knowing the selling price per unit or the variable cost per unit.

Question 8

The Fricker Co. sells three products in a ratio of 3:2:6. The contribution margins for the units are $10, $25, and $30, respectively. Total fixed costs are $119,600.
What is the breakeven point in total number of units?

Accepted Answer

The answer of The Fricker Co. sells three products in...

Question 9

The margin of safety is the:

Accepted Answer

The margin of safety is the amount by which volume of units or sales can drop before an organization reaches the breakeven point, indicating how much cushion a business has in case of unexpected setbacks or changes in sales patterns. Option A defines the concept of the breakeven point. Option C refers to subjective decision-making factors, while option D is incorrect because the margin of safety is directly related to operating leverage.

Question 10

The contribution margin is:

Accepted Answer

The contribution margin is the difference between total revenue and total variable costs. It represents the dollars that contribute to covering fixed costs and then to profit once fixed costs are covered. It is an important measure for determining the break-even point and target profit for a product or service. Therefore, option C is the correct answer while options A, B, and D are incorrect.

Question 11

The contribution margin ratio is:

Accepted Answer

The contribution margin ratio is the percentage of each dollar of revenue that remains after variable costs have been paid. It is calculated by dividing the total contribution margin (total revenue minus total variable costs) by total revenue. So, option B is the correct answer.

Question 12

The Fricker Co. sells three products in a ratio of 3:2:6. The contribution margins for the units are $10, $25, and $30, respectively. Total fixed costs are $119,600.
How many of each product must be sold to realize a pre-tax profit of $39,000? $$\begin{array} { l l l } 
\text { a) } 450 ; & 300 ; & 900 \
\text { b) } 1,830 ; & 1,220 ; & 3,660 \
\text { c) } 1,380 ; & 920 ; & 2,760 \
\text { d) } 7,320 ; & 4,880 ; & 14,640
\end{array}$$

Accepted Answer

The answer of The Fricker Co. sells three products in...

Question 13

Salmon Co. is deciding between two compensation plans. In Plan A, salaries are $100,000 and the commission is $2 per unit. In Plan B, salaries are $40,000 and the commission is $4 per unit.
Which of the following statements is true?

Accepted Answer

If expected sales are lower than the indifference point, Blackmon would prefer Plan B because Plan B has a lower fixed cost and a higher commission rate.

Question 14

Melissa Moser expects next year's degree of operating leverage to increase. Which of the following statements is consistent with Melissa's expectations?

Accepted Answer

The answer of Melissa Moser expects next year's degree of...

Question 15

Degree of operating leverage is:

Accepted Answer

Degree of operating leverage (DOL) is the percentage change in operating income (EBIT) due to a percentage change in sales. It is calculated by dividing the contribution margin by operating income (EBIT). Therefore, choice A is the correct answer as it represents the calculation of DOL. Choice B is the ratio of total variable costs to total revenues, which is not directly related to DOL. Choice C refers to the breakeven point, which is not the same as DOL. Choice D is not true as DOL is important in determining the sensitivity of operating income to changes in sales regardless of the level of profitability.

Question 16

Mike Moser prefers alternatives that lower the degree of operating leverage. Which of the following statements about Mike is probably true?

Accepted Answer

Lowering the degree of operating leverage is a strategy that reduces a company's fixed costs relative to its variable costs, which in turn reduces the company's risk exposure to fluctuations in sales volume. This suggests that Mike prefers to avoid risk, which could be indicative of a pessimistic outlook on the unpredictability of business or market conditions. Therefore, both options B (Mike is a pessimist) and C (Mike likes to avoid risk) are likely to be true, making option D the correct answer.

Question 17

Sales mix reflects:

Accepted Answer

Sales mix refers to the proportion or percentage of each product or service sold in a given period. It is a ratio of each product's sales to the total sales of all products. Therefore, it reflects the number of products and each product's proportional weight within total sales. The sales mix is an important consideration in determining the overall profitability of a company, as different products have different levels of contribution margin and cost structures.

Question 18

Higher operating leverage:

Accepted Answer

Higher operating leverage means that a larger proportion of costs are fixed, which results in higher risk of loss if operations are near the breakeven point. This is because even a small decrease in sales can lead to a significant decrease in profits or even losses. Therefore, higher operating leverage should be managed to mitigate this risk.

Question 19

When performing CVP analysis for a single product:

Accepted Answer

The contribution margin per unit is a key component in calculating the breakeven point in CVP analysis. Other information such as variable costs and fixed costs are also needed, but the price per unit is not always necessary as long as the contribution margin per unit and other relevant information are known. Fixed costs can vary depending on the company and the product being analyzed, and the level of operating leverage depends on the amount of fixed costs relative to variable costs. Therefore, choices C and D are not necessarily true statements for all situations.

Question 20

The relevant range is important because:

Accepted Answer

The relevant range is important because fixed and variable costs may behave differently outside of this range, potentially changing in ways not predicted by models that assume constant per unit variable costs and total fixed costs.

Quiz 3: Cost-Volume-Profit Analysis