Question 1

The degree of operating leverage is greatest at sales levels near the break-even point and decreases as sales rise.

Accepted Answer

This statement is true because the degree of operating leverage measures the percentage change in operating profit resulting from a percentage change in sales. At sales levels near the break-even point, a small increase in sales can lead to a relatively large increase in operating profit, resulting in a higher degree of operating leverage. As sales continue to rise, the percentage increase in operating profit resulting from a percentage increase in sales begins to decrease, leading to a lower degree of operating leverage.

Question 2

The contribution margin ratio measures the effect on the total contribution margin of a given change in total sales.

Accepted Answer

The contribution margin ratio is calculated by dividing the total contribution margin by total sales, and it represents the portion of each sales dollar that is available to cover fixed expenses and generate profit. The ratio can also be used to determine the impact of changes in sales volume on the contribution margin. For example, if the contribution margin ratio is 40% and total sales increase by 10%, the total contribution margin would increase by 4%.

Question 3

Which of the following is an assumption that is NOT made in most cost-volume-profit calculations?

Accepted Answer

Cost-volume-profit calculations typically assume that fixed expenses do not change per unit, but rather remain constant in total. Therefore, assuming fixed expense per unit does not change is incorrect.

Question 4

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

Accepted Answer

The degree of operating leverage decreases as sales increase beyond the break-even point because fixed costs are spread over more units, reducing the impact of fixed costs on each additional unit sold.

Question 5

If a company increases advertising by $500,000, this will cause net operating income to increase if the resulting increase in sales dollars is greater than:

Accepted Answer

The increase in sales dollars must cover the additional advertising cost. The contribution margin ratio indicates how much of each sales dollar contributes to covering fixed costs and profit. Therefore, the increase in sales must be enough to cover the $500,000 increase in advertising, which is calculated by dividing $500,000 by the contribution margin ratio.

Question 6

Assuming that the unit sales are unchanged, the total contribution margin will decrease if:

Accepted Answer

The total contribution margin will decrease if the variable expense per unit increases, as this reduces the difference between sales revenue and variable costs per unit.

Question 7

A company with sales of $100,000, variable expenses of $70,000, and fixed expenses of $50,000 will reach its break-even point if sales are increased by $20,000.

Accepted Answer

The company needs to cover both variable and fixed expenses to break even. With sales of $120,000, the contribution margin is $50,000 ($120,000 - $70,000), which is still not enough to cover the fixed expenses of $50,000.

Question 8

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

Accepted Answer

In periods of increasing sales, a company with high fixed costs and low variable costs will see a more rapid increase in net operating income due to the operating leverage effect, where fixed costs are spread over a larger sales volume, increasing profitability.

Question 9

Once the break-even point is reached:

Accepted Answer

Once the break-even point is reached, every additional unit sold will bring in revenue greater than its variable cost, thus increasing the net operating income by the unit contribution margin. Option A is incorrect because the total contribution margin may be positive or negative before and after the break-even point, depending on the sales mix of products. Option C is incorrect because variable expenses increase proportionally with the number of units sold past the break-even point. Option D is incorrect because the contribution margin ratio remains constant, indicating the percentage of sales revenue that contributes to covering fixed costs and generating profit.

Question 10

If the sales mix changes, the average contribution margin ratio is likely to change as well.

Accepted Answer

The contribution margin ratio is calculated as the total contribution margin divided by the total sales. If the sales mix changes, the contribution margin per unit for each product may change, which can affect the overall average contribution margin ratio. Therefore, it is likely to change.

Question 11

At the break-even point, variable expenses and fixed expenses are equal.

Accepted Answer

At the break-even point, total revenue equals total expenses (both fixed and variable), but variable expenses and fixed expenses are not necessarily equal.

Question 12

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

Accepted Answer

This is true because above the break-even point, the total revenue generated by selling products or services will be higher than the total expenses incurred to produce and sell those products or services. This means that the company is earning a profit on every unit sold above the break-even point, which is reflected in the revenue line being higher than the total expense line.

Question 13

The profit in cost-volume-profit equations is the same as the net operating income on a contribution income statement.

Accepted Answer

The profit in cost-volume-profit equations represents the amount by which revenue exceeds total variable and fixed costs. This is equivalently known as net operating income on a contribution income statement, which shows how much revenue is left over after subtracting variable expenses. Therefore, the statement that the profit in cost-volume-profit equations is the same as the net operating income on a contribution income statement is true.

Question 14

A contribution approach income statement can usually be easily prepared from the information contained in a corporation's published income statement.

Accepted Answer

A contribution approach income statement requires specific information on variable and fixed costs, which is not typically detailed in a corporation's published income statement.

Question 15

On a CVP graph for a profitable company, the line representing total expenses is steeper than the line representing total revenue.

Accepted Answer

If a company is profitable, its total revenue line should be steeper than its total expenses line. This is because the higher the level of production/sales, the higher the revenue, whereas total expenses may not increase at the same rate.

Question 16

All other things equal, the margin of safety in a company with high fixed costs and low variable costs will tend to be higher than the margin of safety in a similar company that has low fixed costs and high variable costs.

Accepted Answer

A company with high fixed costs and low variable costs will have a lower margin of safety because it needs to generate more sales to cover its higher fixed costs, compared to a company with low fixed costs and high variable costs.

Question 17

Which of the following is true regarding the contribution margin ratio of a single product company?

Accepted Answer

This is known as the contribution margin equation, which can be expressed as follows: Contribution Margin Ratio x Sales = Contribution Margin - Fixed Expenses = Net Operating Income. Therefore, if sales increase, the dollar increase in net operating income can be computed by multiplying the contribution margin ratio by the dollar increase in sales. Option A is incorrect since the contribution margin ratio holds constant regardless of changes in fixed expenses. Option B is incorrect because the contribution margin per unit is equal to the price per unit minus the variable expense per unit, not the contribution margin ratio multiplied by the variable expense per unit. Option D is incorrect because the contribution margin ratio remains the same regardless of the number of units sold.

Question 18

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

Accepted Answer

Variable expenses are costs that change with variations in productivity. If variable expense per unit decreases, the overall cost of making each unit decreases as well, which, in turn, will reduce the break-even point. Therefore, a decrease in variable expense per unit will reduce the break-even point.

Question 19

On a cost-volume-profit graph, the break-even point is located:

Accepted Answer

The break-even point on a cost-volume-profit graph is where the total revenue line intersects the total expenses line, indicating no profit or loss.

Question 20

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

Accepted Answer

An increase in the number of units sold does not affect the break-even point, which is determined by fixed costs, variable costs per unit, and selling price per unit.

Quiz 6: Cost-Volume-Profit Relationship