Question 1

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

Accepted Answer

Determining the break-even point requires calculating the point at which total revenue equals total costs, which involves more than just adding together expenses from the income statement. It requires analyzing various factors such as the price per unit, variable costs per unit, and fixed costs.

Question 2

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

Accepted Answer

The contribution margin ratio is a measure of how much each unit sold contributes to covering the fixed costs of a business. The larger the contribution margin ratio, the more sales are required to cover the fixed expenses. The smaller the contribution margin ratio, the more easily the fixed expenses can be covered with fewer sales.

Question 3

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

False

Question 4

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 5

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 will have higher fixed costs due to investing heavily in capital equipment and technology. This means that the break-even point (the level of sales where total revenue equals total costs) will be higher as the company needs to sell more products to cover its fixed costs. On the other hand, a less capital intensive company will have lower fixed costs and a lower break-even point. The margin of safety (the difference between actual sales and the break-even point) will also be lower for a capital intensive, automated company as there is less flexibility in reducing fixed costs in the short-term.

Question 6

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 statement is true. The unit contribution margin is the amount that each unit sold contributes to covering the fixed costs and generating profit. By multiplying the number of units sold above or below the break-even point by the unit contribution margin, we can estimate the profit at different levels of activity.

Question 7

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 the changes that will result from a decision, not just those that remain constant. Therefore, the statement is false.

Question 8

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 ratio is calculated as contribution margin divided by sales revenue, and a lower variable expense per unit means a higher contribution margin per unit, which ultimately leads to a higher contribution margin ratio.

Question 9

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 units sold does not change the break-even point; it potentially moves the company closer to reaching it by increasing revenue.

Question 10

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

Accepted Answer

On a CVP graph for a profitable company, the total revenue line will be steeper than the total expense line. This is because as the volume of sales increases, the total revenue will incråease at a faster rate than the total expenses.

Question 11

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

Fixed expenses are costs that do not vary with the level of sales, such as rent, salaries, etc. If these expenses increase by $10,000 per year, the breakeven point (the point at which total revenue equals total expenses) will also increase. This is because the business now has to generate more revenue to cover the higher fixed expenses. However, the increase in breakeven point will generally be more than $10,000 because variable expenses (such as the cost of goods sold) also increase with sales. As sales increase to cover the higher fixed expenses, the variable expenses will increase as well, which means that more sales will be needed to reach the new breakeven point.

Question 12

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

Accepted Answer

Fixed costs remain constant regardless of the level of production or sales, so expressing them on a per unit basis can make them appear to be variable costs. However, it's important to keep in mind that fixed costs do not change with production or sales volume.

Question 13

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 14

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 proportion of sales revenue is contributing towards covering fixed costs and generating net operating income. Therefore, a high contribution margin ratio will produce more net operating income than a low contribution margin ratio for a given level of sales.

Question 15

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 the decrease in the profit margin of low-margin items can offset the increase in profit due to higher sales volume, leading to a net decrease in overall profits.

Question 16

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. The break-even point represents the number of units a company needs to sell in order to cover all of its fixed and variable costs and achieve a profit of zero.

Question 17

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 is correct. The CVP graph shows the relationship between unit volume and total revenue, total costs, and profits. Unit volume is typically shown on the X-axis, while dollars are shown on the Y-axis.

Question 18

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

A shift in the sales mix from low-margin items to high-margin items will increase the overall profit margin, and therefore increase total profits even if total sales do not necessarily increase.

Question 19

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 does not directly change the break-even point calculation.

Question 20

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 by subtracting the break-even point from the expected or actual sales. The contribution margin is calculated by subtracting variable costs from sales. Two companies with the same margin of safety in dollars can have different total contribution margins if they have different cost structures and selling prices.

Quiz 5: Cost-Volume-Profit Relationships