AC202 (CH18)

Which one of the following is not an assumption of cost-volume-profit analysis?

Changes in activity and sales mix are the only factors that affect costs.

The break-even point can be

Computed from a mathematical equation. Computed by using contribution margin. Derived from a cost-volume-profit graph

Why is determination of a relevant range important?

Cost behavior outside the relevant range may be distorted

Contribution margin

Is revenue remaining after deducting variable costs. May be expressed as contribution margin per unit

Which one of the following is correct concerning contribution margin?

It is helpful in determining the effect of changes in sales on net income.

Which one of the following is not an assumption of CVP analysis?

Profit for the period is constant.

On a CVP income statement

Sales - Variable costs = Contribution margin

What is contribution margin?

The amount available to cover fixed costs and contribute to profits.

The amount of income or loss at each level of sales can be derived from the total sales and total cost lines in a CVP graph

True

Variable costs are costs that

Vary in total directly and proportionately with changes in the activity level. Remain the same per unit at every activity level.

Which statement describes a fixed cost?

When activity declines, its cost per unit increases.

Margin of safety is computed as

actual sales - break-even sales

Mixed costs

are costs that vary as activity level changes, but do not stay the same per unit like variable cost

At the break-even point

contribution margin equals total fixed costs

The break-even point in dollars is computed by dividing

fixed costs by contribution margin ratio.

CVP analysis considers the interrelationships among all of the following components except

fixed costs per unit

One of the following is not involved in CVP analysis. That factor is

fixed costs per unit

Required sales in dollars to meet a target net income is computed by dividing

fixed costs plus target net income by contribution margin ratio

The margin of safety ratio is computed by dividing

margin of safety in dollars by actual sales

Costs that change in total but not proportionately with changes in the activity level a

mixed costs

When comparing a traditional income statement to a CVP income statement

net income will always by identical on both

Which of the following is likely to contain a linear relationship between costs and activities?

relevant range

contribution margin=

sales-variable costs

Contribution margin is

the amount available to cover fixed costs and contribute to income for the company

Cost-volume-profit analysis includes all of the following assumptions except

the behavior of costs is curvilinear throughout the relevant range

The relevant range is

the range over which the company expects to operate during a year.

Cost-volume-profit analysis assumes that changes in activity are the only factors that affect costs.

true

Margin of safety is the difference between actual sales and sales at the break-even point.

true

Target net income is an income objective for individual product lines set by management.

true

An example of a mixed cost is

utility costs

Mixed costs consist of a

variable cost element and a fixed cost element

What type of cost remains the same per unit at every level of activity?

variable costs

The mathematical equation for computing required sales to obtain target net income is: Required sales =

variable costs + fixed costs + target net income