Question 1

Operating leverage refers to the level of fixed costs within an organization.

Accepted Answer

Operating leverage is defined as the extent to which fixed costs are present in a company's cost structure. A high operating leverage means that a company has a higher proportion of fixed costs relative to variable costs, and a small change in revenue or sales can result in significant changes in operating income or profit.

Question 2

Although absorption costing meets the requirements of generally accepted accounting principles,variable costing is typically more useful for internal decision making purposes.

Accepted Answer

Variable costing separates fixed and variable costs, making it easier for managers to make decisions about production and pricing. Absorption costing, on the other hand, allocates fixed costs to products, which can create misleading information for decision making. Therefore, variable costing is typically more useful for internal decision making purposes. However, absorption costing is required by generally accepted accounting principles for external financial reporting.

Question 3

The break-even point is the number of units or sales dollars that must be sold to achieve zero profit.

Accepted Answer

This is true. The break-even point is the level of sales at which total costs equal total revenues, resulting in zero profit or loss.

Question 4

Contribution margin per unit is calculated by subtracting variable costs per unit and fixed costs per unit from the selling price per unit.

Accepted Answer

Contribution margin per unit is calculated by subtracting variable costs per unit from the selling price per unit; fixed costs are not considered in this calculation.

Question 5

Target profit before taxes is calculated as target profit after tax divided by one minus the tax rate.

Accepted Answer

Target profit before taxes is indeed calculated by dividing the target profit after tax by one minus the tax rate, to adjust for the effect of taxes on the profit.

Question 6

Sensitivity analysis is also called "what-if analysis."

Accepted Answer

Sensitivity analysis is also known as "what-if analysis" as it involves changing one or more variables in a model to see how the overall results are impacted. It is often used in business, finance, and economics to help in decision-making and risk analysis.

Question 7

The only difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead costs.

Accepted Answer

Absorption costing includes fixed manufacturing overhead costs in the cost of goods sold, while variable costing only considers variable costs in the cost of goods sold.

Question 8

When a company that produces multiple products faces a constraint in areas such as labor hours or machine hours,managers often prefer to maximize the contribution margin per unit of constraint.

Accepted Answer

This is true as maximizing the contribution margin per unit of constraint would ensure that the company is utilizing its limited resources efficiently and generating maximum profit.

Question 9

The weighted average contribution margin ratio is calculated by taking total contribution margin divided by total sales.

Accepted Answer

The statement is correct. The weighted average contribution margin ratio is calculated by taking the total contribution margin divided by the total sales. This ratio helps businesses understand how much profit they are making on each dollar of sales.

Question 10

The margin of safety cannot be calculated for multiple product and service organizations.

Accepted Answer

The margin of safety can be calculated for multiple product and service organizations but it requires a more complex analysis as compared to single product organizations.

Question 11

The contribution margin per unit is the amount each unit sold contributes to covering fixed costs and increasing profit.

Accepted Answer

The contribution margin per unit is calculated by subtracting variable costs from the selling price of each unit. This amount contributes to covering fixed costs and increasing profit. Therefore, the statement is true.

Question 12

A company makes four products.If it sells everything it produces and is only constrained by finding enough skilled labor,then its goal should be to maximize the contribution margin per labor-hour.

Accepted Answer

Contribution margin is the difference between the selling price and the variable cost per unit, and it indicates how much each unit sold contributes to covering fixed costs and generating profits. Labor-hour is one of the major factors affecting variable costs, and it is a limited resource for the company. Therefore, if the company wants to maximize its profits, it should focus on producing the products that generate the highest contribution margin per labor-hour to make the most of its scarce resources.

Question 13

Firms with low operating leverage tend to make more from increasing sales than similar firms with high operating leverage.

Accepted Answer

Firms with high operating leverage benefit more from increasing sales because their fixed costs are spread over more units, improving profit margins more significantly than firms with low operating leverage, which have a higher proportion of variable costs.

Question 14

Absorption costing treats fixed manufacturing overhead costs as product costs.

Accepted Answer

Absorption costing includes fixed manufacturing overhead costs as a product cost, along with direct materials, direct labor, and variable overhead costs. This means that the cost of each unit includes a portion of the fixed overhead expenses, which can lead to higher reported profits when more units are produced and sold.

Question 15

A decrease in variable costs will reduce the margin of safety.

Accepted Answer

A decrease in variable costs will increase the margin of safety. This is because the margin of safety is the amount by which actual sales exceed the break-even point, which is determined by dividing fixed costs by the contribution margin (sales revenue minus variable costs). If variable costs decrease, the contribution margin will increase, which means the break-even point will be reached at a lower sales volume. As a result, the margin of safety will increase.

Question 16

Firms with high operating leverage tend to make more from increasing sales than similar firms with low operating leverage.

Accepted Answer

Firms with high operating leverage have relatively high fixed costs and low variable costs. This means that as sales increase, the proportion of profits also increases, as more revenue goes towards covering fixed costs, which do not increase with higher sales. In contrast, firms with low operating leverage have relatively high variable costs and low fixed costs, so as sales increase, a larger proportion of revenue goes towards variable costs, decreasing the overall profit margin. Therefore, the statement is true.

Question 17

Sensitivity analysis can be used to determine how changes in variables will impact target profit.

Accepted Answer

Sensitivity analysis helps in identifying the impact of changes in variables on the target metric, which in this case is profit. Therefore, statement A is true.

Question 18

The break-even point in sales dollars is the total sales dollars minus the total contribution margin.

Accepted Answer

The break-even point in sales dollars is actually the point at which total sales equals total expenses (both fixed and variable), not total sales minus the total contribution margin. The formula to calculate the break-even point in sales dollars often involves dividing the total fixed costs by the contribution margin ratio.

Question 19

A change in the sales mix will always decrease the break-even point.

Accepted Answer

A change in the sales mix can either increase or decrease the break-even point depending on whether the products added have a higher or lower contribution margin than those they replace or alter in proportion.

Question 20

It is important for all profit and non-profit companies to determine their profit desired after accounting for income taxes.

Accepted Answer

Non-profit companies do not aim to generate profit; instead, they focus on their mission and ensuring their revenues cover their operating costs. Profit determination after taxes is more relevant for profit-oriented businesses.

Quiz 6: How Is Cost-Volume-Profit Analysis Used for Decision Making