Accounting Exam 4

OPERATING LEVERAGE

The relative amount of fixed and variable costs that make up a firm's total costs.

BREAKEVEN POINT

The sales level at which operating income is zero: Total revenues = Total expenses.

MARGIN OF SAFETY

Excess of expected sales over breakeven sales; the drop in sales a company can absorb without incurring an operating loss.

COST-VOLUME-PROFIT (CVP) ANALYSIS

Expresses the relationships among costs, volume, and profit or loss.

The contribution margin is: A. Sales revenue minus operating expenses. B. Sales revenue minus cost of goods sold. C. Sales revenue minus variable expenses. D. Sales revenue minus fixed expenses.

C. Sales revenue minus variable expenses.

The contribution margin ratio is: A. Contribution margin divided by sales revenue. B. Sales revenue divided by contribution margin. C. Fixed expenses divided by variable expenses. D. Contribution margin divided by variable expenses.

A. Contribution margin divided by sales revenue.

For a given level of​ sales, a​ company's operating leverage is defined as: A. contribution margin​ / operating income. B. contribution margin​ / sales. C. operating income​ / contribution margin. D. sales revenue​ / contribution margin.

A. contribution margin​ / operating income.

The formula to find the breakeven point or a target profit volume in terms of number of units that need to be sold​ is: A. ​(Fixed expenses​ + Variable​ expenses) / Sales revenue B. (Fixed expenses​ + Operating​ income) / Contribution margin per unit C. ​(Fixed expenses​ + Variable​ expenses) / Contribution margin per unit D. (Fixed expenses​ + Operating​ income) / Sales revenue

B. (Fixed expenses​ + Operating​ income) / Contribution margin per unit

All else being​ equal, a decrease in a​ company's fixed expenses​ will: A. increase the sales needed to break even. B. decrease the sales needed to break even. C. decrease the contribution margin. D. increase the contribution margin.

B. decrease the sales needed to break even.

Which of the following is false regarding choosing between two cost​ structures: A. The indifference point is the point at which costs under two options are the same. B. Choose the lower operating leverage option when sales volume is expected to be lower than the indifference point. C. The indifference point is the point where total revenues equal total expenses. D. Choose the higher operating leverage option when sales volume is expected to be higher than the indifference point.

C. The indifference point is the point where total revenues equal total expenses.

A company with a low operating leverage: A. has an equal proportion of fixed and variable costs. B. has relatively more fixed costs than variable costs. C. has relatively more variable costs than fixed costs. D. has relatively more risk than a company with high operating leverage.

C. has relatively more variable costs than fixed costs.

All else being​ equal, if a​ company's variable expenses​ increase, A. its breakeven point will decrease. B. there will be no effect on the breakeven point. C. its contribution margin ratio will decrease. D. its contribution margin ratio will increase.

C. its contribution margin ratio will decrease.

CONTRIBUTION MARGIN RATIO

Ratio of contribution margin to sales revenue.

UNIT CONTRIBUTION MARGIN

The excess of the unit sales price over the variable cost per unit: also called contribution margin per unit.

CONTRIBUTION MARGIN PER UNIT

The excess of the unit sales price over the variable cost per unit; also called unit contribution margin.

INDIFFERENCE POINT

The volume of sales at which a company would be indifferent between alternative cost structures because they would result in the same total cost.