Question 1

Garmo Co.has an operating leverage of 5.Next year's sales are expected to increase by 10%.The company's operating income will increase by 50%.

Accepted Answer

Operating leverage = % change in operating income / % change in sales

Given:

Operating leverage = 5
Expected % change in sales = 10%
Expected % change in operating income = 50%

Using the operating leverage formula:

5 = (50% increase in operating income) / (10% increase in sales)

Solving for the increase in operating income:

50% increase in operating income = 5 * 10% increase in sales
50% increase in operating income = 0.5 * 10% of current sales

Therefore, we can conclude that the operating income will increase by 5% of the current sales. So, the statement is true.

Question 2

If a business sells two products, it is not possible to estimate the break-even point.

Accepted Answer

It is possible to estimate the break-even point for businesses selling multiple products by calculating the contribution margin ratio for both products and combining them to find the overall break-even point.

Question 3

The adoption of variable costing for managerial decision making is based on the premise that fixed factory overhead costs are related to productive capacity of the manufacturing plant and are normally not affected by the number of units produced.

Accepted Answer

Variable costing treats fixed factory overhead costs as period costs rather than product costs, based on the understanding that these costs do not vary with the number of units produced and are more related to the capacity and operational readiness of the manufacturing plant.

Question 4

In an absorption costing income statement, the manufacturing margin is the excess of sales over the variable cost of goods sold.

Accepted Answer

In an absorption costing income statement, the manufacturing margin is the excess of sales over the total cost of goods sold, including both variable and fixed manufacturing costs.

Question 5

If the volume of sales is $7,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 45.8%.

Accepted Answer

The margin of safety is calculated as (Current Sales - Break-even Sales) / Current Sales. So, it would be ($7,000,000 - $4,800,000) / $7,000,000 = $2,200,000 / $7,000,000 = 0.3143 or 31.43%, not 45.8%.

Question 6

Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the cost-volume-profit chart.

Accepted Answer

A cost-volume-profit (CVP) chart typically includes multiple lines representing various elements such as total sales revenue, total fixed costs, total variable costs, and the total cost line, which is the sum of fixed and variable costs, not just a single line.

Question 7

If a business sells four products, it is not possible to estimate the break-even point.

Accepted Answer

It is possible to estimate the break-even point for a business that sells four products. The break-even point is a function of the total costs and the contribution margin, which can be calculated for each product and then aggregated to obtain the overall break-even point.

Question 8

Even if a business sells six products, it is possible to estimate the break-even point.

Accepted Answer

The break-even point can be estimated using the total costs and revenues of the business, regardless of the number of products being sold.

Question 9

If the volume of sales is $6,000,000 and sales at the break-even point amount to $4,800,000, the margin of safety is 25%.

Accepted Answer

The margin of safety is calculated as (Current Sales - Break-even Sales) / Current Sales. So, ($6,000,000 - $4,800,000) / $6,000,000 = $1,200,000 / $6,000,000 = 0.2 or 20%.

Question 10

Absorption costing is required for financial reporting under generally accepted accounting principles.

Accepted Answer

Absorption costing is required for financial reporting under generally accepted accounting principles because it assigns all costs (including fixed overhead) to the product and recognizes them as an expense when the product is sold. This method is used to provide a more accurate representation of the true cost of producing a product.

Question 11

Companies with large amounts of fixed costs will generally have a high operating leverage.

Accepted Answer

Fixed costs are costs that do not vary with changes in the level of production or sales. Companies with large amounts of fixed costs will have a relatively lower variable cost per unit, and as a result, a higher operating leverage. Operating leverage refers to the degree to which a company's fixed costs are used in its operations, and a high operating leverage indicates that a company has a higher proportion of fixed costs compared to variable costs.

Question 12

The reliability of cost-volume-profit analysis does not depend on the assumption that costs can be accurately divided into fixed and variable components.

Accepted Answer

The reliability of cost-volume-profit analysis heavily relies on the accuracy of classifying costs into fixed and variable components. If costs are improperly classified or if there are other cost behaviors present, the analysis may not provide accurate results.

Question 13

Assuming no other changes, operating income will be the same under both the variable and absorption costing methods when the number of units manufactured equals the number of units sold.

Accepted Answer

When the number of units manufactured equals the number of units sold, there are no units left in inventory, so there is no difference in income calculation between the absorption and variable costing methods. Both methods will allocate all of the manufacturing costs to the cost of goods sold, resulting in the same operating income.

Question 14

A low operating leverage is normal for highly automated industries.

Accepted Answer

Highly automated industries typically have high fixed costs due to the expensive equipment and technology required, leading to high operating leverage. Low operating leverage is more characteristic of service-oriented businesses with variable costs.

Question 15

If fixed costs are $650,000 and the unit contribution margin is $30, the sales necessary to earn an operating income of $30,000 are 14,000 units.

Accepted Answer

To calculate the sales necessary to earn a specific operating income, you use the formula: (Fixed Costs + Desired Operating Income) / Unit Contribution Margin. Plugging in the numbers: ($650,000 + $30,000) / $30 = 22,667 units, not 14,000 units.

Question 16

If fixed costs are $450,000 and the unit contribution margin is $50, the sales necessary to earn an operating income of $50,000 are 10,000 units.

Accepted Answer

To calculate the sales necessary to earn an operating income of $50,000, we use the formula: 
Operating Income = (Unit Contribution Margin x Units sold) - Fixed Costs
$50,000 = ($50 x Units sold) - $450,000
$50 x Units sold = $500,000
Units sold = 10,000. Therefore, the answer is A, True.

Question 17

Cost-volume-profit analysis can be presented in both equation form and graphic form.

Accepted Answer

Cost-volume-profit analysis can be presented in both equation form (such as the formula for calculating contribution margin) and graphic form (such as a breakeven chart or a profit-volume chart).

Question 18

If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 11,500 units.

Accepted Answer

The margin of safety is not measured in units, but in dollars or percentage. Therefore, the given information cannot determine the margin of safety in units.

Question 19

Only a single line, which represents the difference between total sales revenues and total costs, is plotted on the profit-volume chart.

Accepted Answer

A profit-volume (PV) chart plots only the difference between total sales revenues and total costs, showing how profit or loss changes with the volume of output.

Question 20

If the unit selling price is $40, the volume of sales is $3,000,000, sales at the break-even point amount to $2,500,000, and the maximum possible sales are $3,300,000, the margin of safety is 14,500 units.

Accepted Answer

The margin of safety cannot be measured in units as it is a percentage or ratio. It is the difference between the actual sales and the sales at the break-even point, divided by the actual sales, expressed as a percentage. Therefore, the statement is false.

Quiz 4: Cost Behavior and Cost-Volume-Profit Analysis