Question 1

An organization's operating leverage is high when it has a low proportion of variable costs in its total costs.

Accepted Answer

Low variable costs and higher fixed cost cause an organization's operating leverage to be high.

Question 2

The break-even point for an organization with a low operating leverage will be relatively higher than the break-even point for an organization with a high operating leverage.

Accepted Answer

A low operating leverage has lower fixed costs and higher variable costs;therefore,the break-even point will be lower.

Question 3

Microsoft Excel cannot be used to find break-even points.

Accepted Answer

Microsoft Excel can be used to perform break-even analyses,as well as more complicated CVP relationships.

Question 4

If the fixed costs are $2,400,targeted operating profits is $1,200,selling price per unit is $2,and the contribution margin ratio is 40%,then the required sales volume is 9,000 units.

Accepted Answer

($2,400 + 1,200)/40% = $9,000;this is dollars,not units.

Question 5

The total contribution margin is the unit contribution margin multiplied by the number of units minus the fixed component of the total costs (TC).

Accepted Answer

The total contribution margin is the unit contribution margin multiplied by the number of units.

Question 6

If the average selling price is $.60 per unit,the average variable cost is $.36 per unit,and the total fixed costs are $1,500,then sales of 15,000 units will result in operating profits of $3,600.

Accepted Answer

($.60 - .36)× 15,000 - 1,500 = $2,100.

Question 7

Both total revenues (TR)and total costs (TC)are likely to be affected by changes in the output.

Accepted Answer

Fixed costs are not affected by changes in output,up to the point where capacity must be changed,thereby changing fixed costs as well.

Question 8

An increase in the selling price per unit will decrease an organization's operating leverage,assuming sales unit volume doesn't change and there are no other changes in its cost structure.

Accepted Answer

The operating leverage will decrease,even though the total cost structure does not change,because the fixed cost decline relative to selling price.

Question 9

The average selling price is $.60 per unit,the average variable cost is $.36 per unit,and the total fixed costs are $1,500.If operating profits of $900 are desired,a sales volume of 2,500 units is necessary.

Accepted Answer

($1,500 + 900)/($0.60 - .36)= 10,000 units.

Question 10

The contribution margin ratio is the contribution margin per unit divided by the selling price per unit.

Accepted Answer

The statement made in the question is a definition of the contribution margin ratio.

Question 11

Microsoft Excel is ideally suited for analyzing alternative CVP scenarios using its "What-If Analysis" function.

Accepted Answer

Microsoft Excel is ideally suited for performing CVP analyses routinely and alternative scenarios using its "What-If" funtionality.

Question 12

If the fixed costs are $2,400,targeted before-tax operating profit is $1,200,tax rate is 25%,selling price per unit is $2,and contribution margin ratio is 40%,then the sales volume is 9,000 units.

Accepted Answer

(2,400 + 1,200)/(2 × 40%)= 4,500 units.

Question 13

The break-even point in sales dollars is fixed costs divided by the contribution margin ratio.

Accepted Answer

The statement made in the question is a definition of the break-even.

Question 14

Cost-volume-profit (CVP)analysis is more complicated for organizations with multiple products because typically each product has a different contribution margin ratio.

Accepted Answer

Multiple products makes it necessary to develop a weighted-average contribution margin in order to calculate break even.

Question 15

An increase in an organization's fixed costs will result in a lower margin of safety,assuming all other costs and sales remain unchanged.

Accepted Answer

This is due to an upward shift in the fixed and total cost curves relative to the revenue curve,driving the break-even point out;thereby,reducing the difference (margin of safety)between break-even and the point of actual performance.

Question 16

An increase in an organization's tax rate will cause an increase in its break-even point.

Accepted Answer

Taxes have no impact on the break-even point because breakeven is calculated on before-tax profit.

Question 17

Profit is the unit contribution margin multiplied by the number of units minus the fixed component of the total costs (TC).

Accepted Answer

It is true that profit is the unit contribution margin multiplied by the number of units minus the fixed component of the total costs (TC).

Question 18

Before-tax operating profits are equal to the after-tax operating profits divided by (1 - tax rate).

Accepted Answer

After-tax profit = before-tax profit - before-tax profit × tax rate.

Question 19

Cost-volume-profit (CVP)analysis assumes that the production volume equals sales volume so that any changes in unit prices can be ignored.

Accepted Answer

A basic assumption of cost-volume-profit analysis is that changes in inventory are ignored,or put another way,inventory is held constant.

Question 20

If an organization's fixed costs are $2,400,tax rate is 40%,and contribution margin is $5,200,then its after-tax operating profits are $1,680.

Accepted Answer

$5,200 - 2,400 = 2,800 - (2,800 × 40%)= $1,680.

Quiz 3: Fundamentals of Cost-Volume-Profit Analysis