Question 1

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 2

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 depends heavily on the accurate division of costs into fixed and variable components. If costs are inaccurately categorized, the analysis could produce misleading results and lead to flawed business decisions.

Question 3

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 measures the percentage change in operating income resulting from a percentage change in sales. A higher operating leverage means that a small increase in sales will result in a larger increase in operating income. Given the operating leverage of 5, a 10% increase in sales will result in a 50% increase in operating income (10% x 5 = 50%). Therefore, the statement is true.

Question 4

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 a business that sells two products by calculating the total contribution margin for both products and dividing it by the total fixed costs.

Question 5

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

Accepted Answer

Operating leverage is a measure of how sensitive a company's profits are to changes in its revenue. Companies with high fixed costs and low variable costs (such as manufacturing or airline industries) have a high operating leverage because a small change in sales can have a large impact on their profits.

Question 6

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 (GAAP), specifically for creating income statements and balance sheets. This method allocates all production costs, including fixed overhead costs, to the units produced, making it the preferred method of accounting for external reporting purposes.

Question 7

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 information given in the question does not allow us to calculate the margin of safety in units. We can only calculate it in dollars using the formula:

Margin of safety = (Actual sales - Break-even sales)

In this case, the margin of safety would be:

Margin of safety = ($3,000,000 - $2,500,000) 
Margin of safety = $500,000

Therefore, the statement that the margin of safety is 11,500 units is false.

Question 8

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

Accepted Answer

The number of products a business sells does not determine if they can estimate the break-even point. The break-even point can be estimated regardless of the number of products a business sells.

Question 9

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 is no difference in the treatment of fixed manufacturing costs between variable and absorption costing methods, and therefore operating income will be the same under both methods.

Question 10

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

Accepted Answer

The profit-volume chart plots both total sales revenues and total costs as separate lines, as well as the line representing the difference between the two (the profit line).

Question 11

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 12

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 full cost of goods sold (including fixed overhead costs), not just the variable cost of goods sold.

Question 13

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

Accepted Answer

Cost-volume-profit analysis can be expressed in equation form as:

Profit = (Price x Quantity) - Total Variable Costs - Fixed Costs

It can also be presented graphically through a profit-volume graph or a break-even chart.

Question 14

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 15

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 16

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" since it is a percentage, representing the amount by which actual sales exceed break-even sales. Therefore, the statement is false.

Question 17

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 any business selling any number of products. The break-even point can be calculated by dividing the total fixed costs by the difference between the unit price and variable cost per unit.

Question 18

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 19

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 20

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

This is the premise on which variable costing is based, as fixed factory overhead costs are considered to be period costs and are not allocated to individual units of production. Therefore, they are only incurred if production occurs, and not affected by the number of units produced.

Quiz 19: Cost Behavior and Cost-Volume-Profit Analysis