Question 1

All other things the same, in periods of increasing sales, net operating income will tend to increase more rapidly in a company with high fixed costs and low variable costs than in a company with high variable costs and low fixed costs.

Accepted Answer

In periods of increasing sales, a company with high fixed costs and low variable costs will be able to leverage their fixed costs over a larger revenue base, resulting in a higher increase in net operating income. On the other hand, a company with high variable costs and low fixed costs will have to increase variable costs as sales increase, leading to a slower increase in net operating income.

Question 2

All other things the same, an increase in variable expense per unit will reduce the break-even point.

Accepted Answer

An increase in variable expense per unit will increase the break-even point. This is because a higher variable expense per unit means that the company needs to sell more units to cover its fixed costs and make a profit. Therefore, the break-even point will be higher.

Question 3

Reynold Enterprises sells a single product for $25.The variable expense per unit is $15 and the fixed expense per unit is $5 at the current level of sales.The company's net operating income will increase by $10 if one more unit is sold.

Accepted Answer

The contribution margin (selling price - variable expenses) per unit is $10 ($25 - $15) and the contribution margin ratio (contribution margin/selling price) is 40% ($10/$25). Since the company's fixed expense per unit is $5, the break-even point (total fixed expenses/contribution margin ratio) is 12.5 units ($5/40%). Selling one more unit will result in an increase in contribution margin of $10 and thus, an increase in net operating income of $10. Therefore, the statement is true.

Question 4

One assumption in CVP analysis is that the number of units produced and sold does not change.

Accepted Answer

The assumption in CVP analysis is that the number of units produced and sold remains within the relevant range, but it can change based on changes in pricing, cost structures, and other variables.

Question 5

The impact on net operating income of a given dollar change in sales can be computed by multiplying the contribution margin by the dollar change in sales.

Accepted Answer

The answer of The impact on net operating income of...

Question 6

Incremental analysis is generally the most complicated and least direct approach to decision making.

Accepted Answer

Incremental analysis involves analyzing the costs and benefits of each alternative option to determine which one is the most profitable. This approach can be complicated because it requires a detailed calculation of all the incremental costs and benefits associated with each option, and the results may not always be clear or straightforward. Therefore, incremental analysis is often considered the most complicated and least direct approach to decision making.

Question 7

The unit sales volume necessary to reach a target profit is determined by dividing the sum of the fixed expenses and the target profit by the contribution margin per unit.

Accepted Answer

This is the formula for calculating the breakeven point in units. The breakeven point is the point at which total revenue equals total cost (fixed expenses plus variable expenses). To reach a target profit, the unit sales volume needed is calculated by adding the target profit to the fixed expenses and dividing that sum by the contribution margin per unit, which is the selling price minus variable expenses per unit.

Question 8

All other things the same, a reduction in the variable expense per unit will decrease the break-even point.

Accepted Answer

When the variable expense per unit is decreased, the contribution margin per unit increases, which means that less units need to be sold to cover the fixed expenses and reach the break-even point. Therefore, the break-even point decreases.

Question 9

In two companies making the same product and with the same total sales and total expenses, the contribution margin ratio will be higher in the company with a higher proportion of fixed expenses in its cost structure.

Accepted Answer

This is because a higher proportion of fixed expenses means that the variable expenses are lower. This, in turn, leads to a higher contribution margin ratio, which is the percentage of revenue that contributes to covering fixed costs and generating profit.

Question 10

The degree of operating leverage in a company is largest at the break-even point and decreases as sales rise.

Accepted Answer

At the break-even point, the company has no profit or loss and any change in sales will have a significant impact on profits. As sales rise above the break-even point, the degree of operating leverage decreases as fixed costs become a smaller portion of total costs and changes in sales have less of an impact on profits.

Question 11

One way to compute the total contribution margin is to deduct total fixed expenses from net operating income.

Accepted Answer

To compute the total contribution margin, one needs to deduct total variable expenses from the total revenue earned. It is not necessary to consider fixed expenses for contribution margin calculations.

Question 12

The margin of safety in dollars equals the excess of actual sales over budgeted sales.

Accepted Answer

The margin of safety in dollars is the excess of budgeted sales over the break-even sales, not actual sales.

Question 13

All other things the same, if the fixed expenses increase in a company then one would expect the margin of safety to increase.

Accepted Answer

If fixed expenses increase, it means that the break-even point (the point where the company is neither making a profit nor incurring a loss) increases. This means that the level of sales needed to cover the fixed expenses is higher, and therefore the margin of safety (the amount by which actual sales exceed the break-even point) decreases. So, if fixed expenses increase, one would expect the margin of safety to decrease, not increase.

Question 14

As total sales increase beyond the break-even point, the degree of operating leverage will decrease.

Accepted Answer

The degree of operating leverage (DOL) measures the sensitivity of operating income to changes in sales. At the break-even point, the DOL is at its highest, meaning that a small increase in sales will result in a larger increase in operating income. However, as sales continue to increase beyond the break-even point, fixed costs become a smaller portion of total costs, and the DOL decreases. Thus, as total sales increase beyond the break-even point, the degree of operating leverage will decrease.

Question 15

If two companies produce the same product and have the same total sales and same total expenses, operating leverage will be higher in the company with a higher proportion of fixed expenses in its cost structure.

Accepted Answer

Operating leverage measures the extent to which a company's cost structure is composed of fixed costs versus variable costs. A higher proportion of fixed expenses in the cost structure of a company results in higher operating leverage, meaning that a small change in sales can have a significant impact on profits. Therefore, if two companies produce the same product and have the same total sales and expenses, the company with a higher proportion of fixed expenses will have higher operating leverage.

Question 16

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, automated company requires a significant initial investment in equipment and technology which increases the fixed costs. This means that the break-even point (the point where total revenue equals total cost) will be higher than for a less capital intensive company, which has lower fixed costs. Additionally, since the break-even point is higher, the margin of safety (the difference between the break-even point and actual sales) will be lower.

Question 17

All other things the same, an increase in total fixed expenses will increase the break-even point.

Accepted Answer

This is because the break-even point is the level of sales where the total revenue equals the total expenses (both fixed and variable). If fixed expenses increase, the total expenses increase, and therefore the break-even point will increase as well.

Question 18

If sales volume decreases, and all other factors remain unchanged, the contribution margin ratio will decrease.

Accepted Answer

The answer of If sales volume decreases, and all other...

Question 19

On a cost-volume-profit graph, the revenue line will be shown below the total expense line for any activity level above the break-even point.

Accepted Answer

The answer of On a cost-volume-profit graph, the revenue line...

Question 20

At the break-even point, the total contribution margin and fixed expenses are equal.

Accepted Answer

This is the definition of the break-even point - the point where total contribution margin (revenue minus variable expenses) matches fixed expenses.

Quiz 2: Cost-Volume-Profit Relationships