Question 1

An increase in the number of units sold will decrease a company's break-even point.

Accepted Answer

The break-even point is determined by fixed costs, variable costs per unit, and the selling price per unit. An increase in the number of units sold does not directly affect the break-even point; it primarily affects total revenue and potentially profits.

Question 2

The break-even point can be determined by simply adding together all of the expenses from the income statement.

Accepted Answer

The break-even point is determined by calculating the point at which total revenue equals total costs, including both fixed and variable costs. It is not simply a matter of adding up expenses from the income statement.

Question 3

The smaller the contribution margin ratio, the smaller the amount of sales required to cover a given amount of fixed expenses.

Accepted Answer

The smaller the contribution margin ratio, the larger the amount of sales required to cover a given amount of fixed expenses. This is because a smaller contribution margin ratio means that a smaller portion of each sale is available to cover fixed expenses.

Question 4

To estimate what the profit will be at various levels of sales volume, multiply the number of units to be sold above or below the break-even point by the unit contribution margin.

Accepted Answer

This is correct. Profit can be calculated by multiplying the number of units sold above or below the break-even point by the unit contribution margin.

Question 5

If the variable expense per unit decreases, and all other factors remain the same, the contribution margin ratio will increase.

Accepted Answer

The contribution margin ratio is calculated by dividing the contribution margin by net sales revenue. If the variable expense per unit decreases, the contribution margin per unit will increase, leading to a higher contribution margin and a higher contribution margin ratio.

Question 6

In a Cost-Volume-Profit graph, the anticipated profit or loss at any given level of sales is measured by the vertical distance between the total revenue line (sales) and the total fixed expense line.

Accepted Answer

In a Cost-Volume-Profit (CVP) graph, the anticipated profit or loss at any given level of sales is measured by the vertical distance between the total revenue line and the total cost line, which includes both fixed and variable costs, not just the total fixed expense line.

Question 7

When expressed on a per unit basis, fixed costs can mislead decision makers into thinking of them as variable costs.

Accepted Answer

Fixed costs do not change with the level of production or sales, but when expressed on a per unit basis, they may give the impression of being variable. This is because the fixed cost per unit decreases as production or sales increase, making it appear to vary with output.

Question 8

If fixed expenses increase by $10,000 per year, then the sales needed to break even will generally increase by more than $10,000.

Accepted Answer

Fixed expenses are one of the components used to calculate the break-even point, along with variable expenses and unit selling price. When fixed expenses increase, the break-even point will generally increase as well, but by more than the amount of the increase in fixed expenses. This is because the increase in fixed expenses must be covered by additional sales revenue, but each additional sale also incurs variable expenses that reduce the contribution margin. Therefore, more sales are required to cover the fixed expense increase and make up for the decreased contribution margin.

Question 9

The break-even point in units can be obtained by dividing total fixed expenses by the unit contribution margin.

Accepted Answer

This is a commonly used formula to calculate the break-even point, where the fixed expenses are divided by the contribution margin per unit to determine the number of units that need to be sold to cover the fixed expenses.

Question 10

A shift in the sales mix from low-margin items to high-margin items will decrease total profits even though total sales increase.

Accepted Answer

A shift in the sales mix to high-margin items will increase the profit margin on each individual item sold. This means that even if the total sales volume stays the same or decreases, the overall profit will increase.

Question 11

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

Accepted Answer

The contribution margin ratio is calculated as (Sales - Variable Expenses) / Sales, and it is not directly affected by the proportion of fixed expenses in a company's cost structure. It primarily reflects the relationship between sales and variable expenses.

Question 12

Two companies with the same margin of safety in dollars will also have the same total contribution margin.

Accepted Answer

Margin of safety in dollars is calculated by subtracting the break-even point from actual sales, while total contribution margin is calculated by subtracting total variable costs from total sales. Therefore, two companies with the same margin of safety in dollars can have different levels of total contribution margin depending on their variable cost structure.

Question 13

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 will have higher fixed costs (due to the cost of the capital equipment) and lower variable costs, which leads to a higher break-even point (the point at which total revenue equals total costs). The margin of safety (the amount by which actual or projected sales exceed the break-even point) will also be lower because any decline in sales will have a greater impact on the company's ability to cover its fixed costs.

Question 14

Fawn Company's margin of safety is $90,000. If the company's sales drop by $80,000, it will still have positive net operating income.

Accepted Answer

Since the margin of safety is $90,000, the company's current sales are $90,000 above its breakeven point. This means that if sales drop by $80,000, the company would still be generating $10,000 in net operating income, which is positive. Therefore, the statement is true.

Question 15

For a given level of sales, a low contribution margin ratio will produce more net operating income than a high contribution margin ratio.

Accepted Answer

A high contribution margin ratio means that a larger portion of sales revenue is available to cover fixed costs and contribute to net operating income. Therefore, a high contribution margin ratio will typically produce more net operating income than a low contribution margin ratio for a given level of sales.

Question 16

In a Cost-Volume-Profit graph (sometimes called a break-even chart), unit volume is represented on the horizontal (X) axis and dollars on the vertical (Y) axis.

Accepted Answer

In a Cost-Volume-Profit graph, unit volume is represented on the horizontal (X) axis and dollars on the vertical (Y) axis. This is because the graph is used to analyze the relationship between volume of sales, revenue, and costs to determine the break-even point and potential profitability.

Question 17

On a Cost-Volume-Profit graph for a profitable company, the total expense line will be steeper than the total revenue line.

Accepted Answer

The total revenue line will be steeper than the total expense line for a profitable company. This is because as the company sells more units or services, the total revenue will increase at a faster rate than the total expenses.

Question 18

A shift in the sales mix from high-margin items to low-margin items can cause total profits to decrease even though total sales may increase.

Accepted Answer

When a business sells more low-margin items and fewer high-margin items, their overall profit margin will decrease. Even if total sales increase, the lower profit margin on each item will result in lower overall profits.

Question 19

The total volume in sales dollars that would be required to attain a given target profit is determined by dividing the target profit by the contribution margin ratio.

Accepted Answer

The total volume in sales dollars required to attain a target profit is determined by dividing the sum of the target profit and fixed costs by the contribution margin ratio.

Question 20

A decrease in the number of units sold will decrease the break-even point.

Accepted Answer

The break-even point is determined by fixed costs, variable costs per unit, and the selling price per unit. A decrease in the number of units sold affects total revenue and profit, but does not directly change the break-even point, which is the level of sales needed to cover total costs.

Quiz 5: Cost-Volume-Profit Relationships