Question 1

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 2

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 (using formulas to calculate the break-even point, target profit, and other metrics) and graphic form (using charts and graphs to visually represent the relationships between costs, volume, and profit).

Question 3

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

Operating income = (Sales - Variable costs) - Fixed costs
$50,000 = (Sales x $50) - $0. This means that sales must cover only fixed costs plus the desired operating income, since variable costs are already accounted for in the contribution margin. 
Therefore,
Sales = ($50,000 + $450,000)/$50 = 10,000 units.

Question 4

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

Accepted Answer

The break-even point can be calculated based on the fixed and variable costs of the business, regardless of the number of products being sold.

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

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 as it is a method that allocates all manufacturing costs, both variable and fixed, to the products being produced. This includes direct materials, direct labor, and both variable and fixed manufacturing overhead costs.

Question 7

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 does depend on the assumption that costs can be accurately divided into fixed and variable components. This is because the analysis is based on the relationship between sales volume, costs, and profits, which is calculated using fixed and variable costs to determine the breakeven point and target profits. If the assumption is not accurate, the analysis may produce misleading results.

Question 8

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, and the difference between them (i.e. the profit or loss) is represented by the distance between the two lines.

Question 9

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 10

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 change in inventory levels. Therefore, there is no difference in accounting for fixed manufacturing costs between the variable and absorption costing methods. As a result, operating income will be the same under both methods in this scenario.

Question 11

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 12

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 13

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 selling two products, as long as the relevant data (such as sales prices, variable costs, and fixed costs) are available for both products. The break-even point is the level of sales at which total revenue equals total costs, and can be calculated using a formula or graph.

Question 14

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

Accepted Answer

The break-even point can still be estimated if a business sells multiple products. It just requires calculating the total contribution margin for all products, which can then be used to determine the break-even point.

Question 15

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 the difference between actual or expected sales and sales at the break-even point. It is typically expressed in units or dollars.

To calculate margin of safety in units:

Margin of Safety = Volume of Sales - Sales at Break-even Point

In this case:

Margin of Safety = $3,000,000 - $2,500,000
Margin of Safety = $500,000

To convert the margin of safety to units, we need to divide by the unit selling price:

Margin of Safety in Units = Margin of Safety / Unit Selling Price
Margin of Safety in Units = $500,000 / $40
Margin of Safety in Units = 12,500 units

Therefore, the correct answer is B, as the margin of safety is actually 12,500 units, not 11,500 units.

Question 16

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

Accepted Answer

Operating leverage measures the sensitivity of a company's operating income to changes in sales revenue. Companies with high fixed costs will have a higher degree of operating leverage because a larger portion of their costs are fixed and do not change with changes in sales volume. As a result, a small change in revenue can have a significant impact on operating income.

Question 17

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

Using the formula for operating leverage, we can calculate that a 10% increase in sales leads to a 50% increase in operating income:
Operating Leverage = % Change in Operating Income / % Change in Sales
5 = 50% / 10%
Therefore, if sales increase by 10%, then operating income will increase by 50%, as stated in the question.

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 14,500 units.

Accepted Answer

The given information is not enough to calculate the margin of safety in units. Margin of safety in units = (actual sales - break-even sales) / selling price per unit. We do not have the actual sales figure in units, so we cannot calculate the margin of safety accurately. Therefore, it is impossible to say whether the statement is true or false.

Question 19

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 20

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, not just the variable cost of goods sold.

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