Question 1

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

Accepted Answer

False

Question 2

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

False

Question 3

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 4

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

Accepted Answer

The answer of Which of the following is an assumption...

Question 5

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 because above the break-even point, the company is generating enough revenue to cover all of its total expenses, including fixed expenses. Therefore, the revenue line will always be above the total expense line.

Question 6

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

Accepted Answer

The answer of A contribution approach income statement can usually...

Question 7

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

Accepted Answer

The contribution margin ratio is calculated by dividing the total contribution margin by total sales. 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. Therefore, option C is true. Option A is incorrect because the contribution margin ratio remains the same regardless of changes in fixed expenses. Option B is partly true, as the contribution margin per unit is indeed calculated by subtracting variable expenses from the selling price, however, the question asks about the contribution margin ratio, not the contribution margin per unit. Option D is also incorrect as the contribution margin ratio remains the same regardless of the number of units sold.

Question 8

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

Accepted Answer

The answer of At the break-even point,variable expenses and fixed...

Question 9

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

Accepted Answer

The degree of operating leverage is a measure of how sensitive a company's operating income is to changes in sales. When sales are close to the break-even point, a small change in sales volume can have a significant impact on operating income, resulting in a higher degree of operating leverage. As sales increase, the impact of small changes in sales volume on operating income decreases, resulting in a lower degree of operating leverage. Therefore, the statement is true.

Question 10

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

Accepted Answer

The answer of Assuming that the unit sales are unchanged,the...

Question 11

Once the break-even point is reached:

Accepted Answer

Once the break-even point is reached, any additional sales will generate a unit contribution margin that equals the amount of fixed expenses required to reach the break-even point. Therefore, net operating income will increase by the unit contribution margin for each additional item sold.

Question 12

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

Accepted Answer

The answer of An increase in the number of units...

Question 13

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

The answer of All other things equal,the margin of safety...

Question 14

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

The answer of All other things the same,in periods of...

Question 15

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

Accepted Answer

If the variable expense per unit decreases, the contribution margin per unit will increase, making it easier to cover fixed expenses and therefore reducing the break-even point.

Question 16

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

Accepted Answer

This statement is true. The profit on a cost-volume-profit equation takes into account the contribution margin and fixed costs, which is the same as the net operating income on a contribution income statement.

Question 17

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

Accepted Answer

The contribution margin ratio is calculated by dividing the total contribution margin by the total sales revenue. If the sales mix changes, i.e. one product sells more than another or a new product is introduced, then the contribution margins for each product will likely change. This will affect the overall contribution margin and therefore the average contribution margin ratio.

Question 18

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

To determine if the increase in advertising will cause net operating income to increase, we need to compare the increase in sales dollars to the increase in expenses (in this case, the increase in advertising expenses). The contribution margin ratio represents the portion of each sales dollar that is available to cover fixed expenses and contribute to net operating income. Therefore, if the contribution margin ratio is greater than the increase in advertising expenses, net operating income will increase. So, the formula to use is:
Contribution Margin Ratio = (Sales - Variable Expenses) / Sales
Increase in sales dollars needed to cover the increase in advertising expenses = $500,000 / Contribution Margin Ratio

Therefore, choice D, $500,000 divided by the contribution margin ratio, is the best answer.

Question 19

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

Accepted Answer

The statement is true. The contribution margin ratio is calculated by dividing the contribution margin by total sales, and it represents the percentage of each dollar of sales that contributes to covering fixed costs and generating profit. By knowing the contribution margin ratio, managers can assess the impact on profit of changes in sales volume or selling price.

Question 20

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

Accepted Answer

The break-even point occurs where the total revenue line intersects the total expenses line, since this represents the point where the company generates enough revenue to cover all of its expenses and result in zero profit or loss. At this point, the company has reached its break-even volume, where it is neither making a profit nor incurring a loss. Therefore, the correct answer is D.

Quiz 4: Cost-Volume-Profit Relationships