Question 1

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 selling more low-margin items means that although the total revenue may go up, the profit margins on these items are lower, resulting in a decrease in overall profits.

Question 2

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

This statement is false. A higher contribution margin ratio means that more of each sale goes towards covering fixed costs, resulting in higher net operating income.

Question 3

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 the correct formula to estimate profit at different levels of activity using the contribution margin.

Question 4

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

Accepted Answer

If the variable expense per unit decreases, the contribution margin per unit will increase, which will result in a higher contribution margin ratio.

Question 5

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 6

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 7

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

Accepted Answer

This formula is correct for calculating the break-even point in units.

Question 8

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 a part of the calculation of break-even point (BEP), which is the amount of sales required to cover all expenses and make zero profit. An increase in fixed expenses will increase the BEP. However, the increase in BEP will be more than $10,000 if the business has a low contribution margin (the difference between selling price and variable expenses) or if the fixed expenses were already a significant portion of the total expenses before the increase. On the other hand, if the business has a high contribution margin or the fixed expenses were a small portion of total expenses, then the increase in BEP may be less than $10,000.

Question 9

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 the cost structure. It is determined by the relationship between sales and variable expenses, not fixed expenses.

Question 10

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

If a shift in the sales mix occurs from low-margin items to high-margin items, the overall profit will increase because the high-margin items will generate more profit per unit sold. This is known as the "product mix effect," which increases the overall profitability of the business. Thus, total profits will increase, not decrease.

Question 11

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 in revenues and costs that will occur as a result of a decision, not just the ones that will remain the same.

Question 12

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 13

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 based on the level of production, but when expressed on a per unit basis, they may appear to vary with production volume. This can lead decision makers to think of them as variable costs, which can affect their analysis and decision-making.

Question 14

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 company sells more units, they will earn more revenue, but their expenses will not necessarily increase at the same rate. Hence, the revenue line will rise more steeply, resulting in a higher slope compared to the expense line.

Question 15

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

In a CVP graph, unit volume (or quantity) is typically plotted on the horizontal axis, while dollars or revenue is plotted on the vertical axis.

Question 16

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 determined by finding the point at which total revenue equals total expenses. It is not as simple as adding together all expenses from the income statement.

Question 17

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

Accepted Answer

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

Question 18

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 directly affect the break-even point; it potentially increases profit by spreading fixed costs over more units, effectively lowering the fixed cost per unit.

Question 19

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 actual or projected sales. However, the total contribution margin is calculated by subtracting the total variable costs from the total sales. Two companies with the same margin of safety in dollars may have different levels of variable costs and sales, which would result in different total contribution margins.

Question 20

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 and automated company will have higher fixed costs due to the investment in capital and automation, leading to a higher break-even point. The margin of safety will also be lower as a greater portion of sales will be needed to cover these fixed costs before profits can be generated. In contrast, a less capital intensive company will have lower fixed costs and therefore a lower break-even point and higher margin of safety.

Quiz 6: Cost-Volume-Profit Relationships