Question 1

Ecco Company has total fixed costs of $5,000,sells a product whose contribution margin is $50 and selling price per unit is $125,and has current sales of $15,000.The company's margin of safety ratio is 20%.

Accepted Answer

The margin of safety ratio is calculated as (Current Sales - Break-even Sales) / Current Sales. Break-even sales can be found by dividing the total fixed costs by the contribution margin ratio (Contribution Margin per Unit / Selling Price per Unit). In this case, the contribution margin ratio is $50 / $125 = 0.4. Break-even sales = $5,000 / 0.4 = $12,500. Therefore, the margin of safety ratio = ($15,000 - $12,500) / $15,000 = 16.67%, not 20%.

Question 2

In order to perform cost-volume-profit analysis,a company must be able to identify its variable and fixed costs.

Accepted Answer

Cost-volume-profit analysis requires the identification and separation of variable and fixed costs in order to properly calculate contribution margin and determine the break-even point for a business.

Question 3

If a company changes from a labor-intensive system that incurs significant hourly wage cost to an automated system that increases fixed cost,the total cost line on the company's cost-volume-profit graph will shift up and have a steeper slope.

Accepted Answer

The total cost line will shift up due to the increase in fixed costs, but it will have a flatter slope because the variable costs (e.g., hourly wages) decrease with automation, leading to a lower cost per additional unit produced.

Question 4

If a company is operating beyond its break-even point,sale of one more unit of product increases the company's profit by the amount of the unit contribution margin.

Accepted Answer

This statement is true. Beyond the break-even point, each additional unit sold contributes to the company's profit by the amount of the unit contribution margin. This is because fixed costs have already been covered by the sales revenue up until the break-even point, and any further revenue generated by additional sales helps to increase the company's profit.

Question 5

Preston Company sells a product whose contribution margin ratio is 20%.Assuming fixed costs don't change,incremental sales of $50,000 will generate $20,000 of additional profit.

Accepted Answer

With a contribution margin ratio of 20%, incremental sales of $50,000 would generate additional profit of $10,000 (20% of $50,000), not $20,000.

Question 6

One of the advantages of target costing is that it specifically considers the probable market price for the product.

Accepted Answer

Target costing is a cost management approach that starts with the price at which a product is likely to sell and then works backwards to determine the maximum cost that can be incurred to make a profit at that price. Therefore, one of the advantages of target costing is that it takes into account the probable market price for the product, making it more likely that the product will be priced competitively in the market.

Question 7

Assuming a company uses a markup equal to 25% of cost,the cost of a product that sells for $100 is $75.

Accepted Answer

If the markup is 25% of cost, then the cost can be calculated as: 
cost = selling price / (1 + markup percentage)
cost = 100 / (1 + 0.25) = $80
Therefore, the cost of the product that sells for $100 is $80, not $75.

Question 8

Target costing begins with determining the cost of the product and then focusing on developing ways to sell the product at a price that will enable the company to achieve its desired profit margin.

Accepted Answer

Target costing begins with determining the price that the customer will pay for the product and then focusing on developing the product at a cost that will enable the company to achieve its desired profit margin.

Question 9

On a cost-volume-profit graph,the total revenue line lies below the total cost line to the left of the break-even point.

Accepted Answer

Before reaching the break-even point, total costs exceed total revenues, which is why the total revenue line is below the total cost line on a cost-volume-profit graph.

Question 10

Techpro has a selling price of $10 and variable costs of $6.If both the selling price and the variable costs increase by 10%,the break-even point will not change.

Accepted Answer

The answer of Techpro has a selling price of $10...

Question 11

Sensitivity analysis acknowledges that profitability is often affected by multidimensional forces.

Accepted Answer

Sensitivity analysis takes into account various factors that can affect profitability, such as changes in costs, sales volumes, market conditions, and other variables. It recognizes that these forces are multidimensional and interrelated, and seeks to identify how changes in one or more factors can impact the overall profitability of a business or project. Therefore, sensitivity analysis is an important tool for assessing the risks and opportunities associated with different scenarios and making informed decisions based on a range of possible outcomes.

Question 12

The accuracy of cost-volume-profit analysis is limited because it assumes a strictly linear relationship between the variables.

Accepted Answer

Cost-volume-profit analysis assumes that the relationship between cost, volume, and profit is strictly linear, which may not always hold true in the real world. For example, economies of scale or changes in pricing strategies can result in non-linear relationships between these variables. Therefore, the accuracy of cost-volume-profit analysis is limited.

Question 13

Sensitivity analysis is performed in order to determine optimal sales mix.

Accepted Answer

Sensitivity analysis is performed to assess how the results of a decision, model, or system might change with variations in input parameters, not specifically to determine optimal sales mix.

Question 14

A margin of safety of 30% means that every dollar in revenue generates thirty cents in profit.

Accepted Answer

A margin of safety refers to the difference between actual sales and the break-even point. It is not a measure of profit margin.

Question 15

On a cost-volume-profit graph,the total revenue line begins at the break-even point and slopes upward to the right.

Accepted Answer

On a cost-volume-profit graph, the total revenue line begins at the origin (0,0) and slopes upward to the right, indicating that revenue increases as sales volume increases. The break-even point is where the total revenue line intersects the total cost line.

Question 16

An increase in total fixed costs increases the break-even point.

Accepted Answer

Total fixed costs are costs that do not vary with the level of production or sales, such as rent, salaries, or insurance. Since these costs still have to be paid even if no goods or services are produced, they represent a financial obstacle for businesses to overcome before generating profits. Therefore, the higher the total fixed costs, the more sales a firm has to make to cover its expenses and reach the break-even point. In other words, fixed costs raise the bar for the minimum levels of revenue that a company needs to make to break even, which implies a greater reliance on volume and price to achieve profitability. Conversely, lower fixed costs lower the break-even point, as they reduce the amount of sales a firm needs to cover its fixed and variable costs and start making a profit.

Question 17

Database software is especially useful for performing cost-volume-profit sensitivity analysis.

Accepted Answer

While database software can be useful for storing and organizing financial data, cost-volume-profit sensitivity analysis involves manipulating and analyzing this data using specialized financial modeling tools such as spreadsheets or dedicated software programs.

Question 18

Contribution margin cannot be calculated for a service-type business,and cost-volume-profit analysis is not applicable for a company that provides services rather than selling goods.

Accepted Answer

This statement is false. Contribution margin can still be calculated for a service-type business by subtracting variable costs from revenue. Cost-volume-profit analysis can also be applied to a service business by analyzing the relationship between sales volume, costs, and profits.

Question 19

A company can use target profit analysis to determine the level of sales required to earn a target loss.

Accepted Answer

The answer of A company can use target profit analysis...

Question 20

To attain a target profit,the total gross margin generated from sales must be sufficient to cover total fixed costs plus the target profit.

Accepted Answer

The answer of To attain a target profit,the total gross...

Quiz 3: Analysis of Cost, volume, and Pricing to Increase Profitability