BUAD 281 Chapter 7

If the operating leverage for Company A is 6 and sales increase by 3%, there is a _________________% change in net income.

18

If the operating leverage for Company A is 2.9 and sales increase by 15%, there is a __________________% change in net income.

43.5 (15 x 2.9)

As the operating leverage factor increases, ______. a) break-even sales revenue will increase and margin of safety will decrease b) break-even sales revenue will decrease and margin of safety will decrease c) break-even sales revenue will decrease and margin of safety will increase d) break-even sales revenue will increase and margin of safety will increase

A

In a traditional CVP graph, the total cost line intercepts the vertical axis at ______. a) total fixed expenses b) below the origin c) the origin d) total variable expenses

A

Operating leverage for managerial accountants refers to an organization's ability to ______. a) increase net income with changes in sales b) generate sales c) affect fixed costs with changes in sales d) change variable costs with changes in sales

A

Prior to beginning CVP analysis, an organization's ______ should be analyzed. a) cost behavior b) revenues c) profit and loss

A

To calculate the sales dollars or units needed to achieve a target profit, the break-even contribution margin formulas can be modified by ______. a) adding the target profit to fixed expenses b) adding the target profit to contribution margin c) subtracting the target profit from fixed expenses d) subtracting the target profit from contribution margin

A

A profit-volume graph ______. a) crosses the horizontal axis at the breakeven point b) shows profit or loss as the vertical distance between the horizontal axis and profit line c) highlights the profit as the area below the horizontal axis d) highlights the loss as the area above the horizontal axis

A and B

The unit contribution margin can change due to a change in ______ per unit. a) variable cost b) gross profit c) selling price d) fixed cost

A and C

For cost-volume-profit analysis to be valid, within the relevant range, ______. a) total fixed expenses will remain constant b) the number of units produced and sold are equal c) the production process and worker efficiency improves d) the price of the product will not change as sales volume changes. e) total variable expenses will remain constant f) the sales mix remains constant

A, B, D, and F

A flexible manufacturing system ______. a) has very low set up costs and requires little skill to operate b) uses highly automated material-handling equipment to manufacture a variety of similar products c) will result in a lower break-even point in sales revenue d) uses a highly intensive labor system to manufacture a variety of similar products

B

If fixed expenses increase with no other change, the break-even point will ______. a) remain unchanged b) increase c) decrease

B

If the variable cost per unit decreases, the break-even in units will ______. a) remain unchanged b) decrease c) increase

B

Operating leverage is greatest in firms with ______. a) low reliance on fixed costs b) high proportion of fixed costs and low proportion of variable costs c) equal proportions of fixed costs and variable costs d) high proportion of variable costs and low proportion of fixed costs

B

Sales mix is __. a) an average of the contribution margin per unit times the number of units sold b) the relative proportion of each type of product sold c) an average of the number of units sold for each type of product d) an average of the contribution margin per unit

B

Sales mix is __. a) an average of the number of units sold for each type of product b) the relative proportion of each type of product sold c) an average of the contribution margin per unit d) an average of the contribution margin per unit times the number of units sold

B

The break-even point in sales dollars may be calculated as ______. a) actual units x sales price per unit b) break-even units x sales price per unit c) fixed expenses divided by contribution margin per unit d) variable expenses divided by contribution margin per unit

B

The difference between total sales revenue and total variable expenses is ______. a) total fixed expenses b) total contribution margin c) contribution margin per unit d) total gross profit

B

The safety margin is the difference between budgeted ______. a) contribution margin and fixed costs at the break-even point b) sales revenue and break-even sales revenue c) sales and budgeted variable costs at the break-even point d) net income and break-even net income

B

When compared to companies with low operating leverage, companies with a higher operating leverage will have a) higher fixed costs and lower break-even sales revenue b) higher fixed costs and higher break-even sales revenue c) lower fixed costs and lower break-even sales revenue d) lower fixed costs and higher break-even sales revenue

B

When firms introduce advanced manufacturing systems, the break-even point tends to ______. a) remain the same b) increase c) decrease

B because the cost structure of an advanced manufacturing environment tends to have a larger proportion of fixed costs, thereby increasing the break-even point.

The intersection of the total cost line and total revenue line in a CVP graph is the ____________-___________ ____________.

Break-even point

Break-even in sales dollars is calculated as ______. a) unit sales price - variable cost per unit b) fixed expenses/unit contribution margin c) fixed expenses/contribution margin ratio d) variable costs/contribution margin ratio

C

Break-even in sales dollars is calculated as ______. a) variable costs/contribution margin ratio b) unit sales price - variable cost per unit c) fixed expenses/contribution margin ratio d) fixed expenses/unit contribution margin

C

Break-even in units is calculated as ______. a) fixed expenses/contribution margin ratio b) unit sales price - variable cost per unit c) fixed expenses/unit contribution margin d) fixed expenses/unit sales price

C

Break-even point in units x selling price per unit is the calculation for ______. a) break-even costs b) budgeted sales c) break-even sales d) actual sales

C

Cost-volume-profit analysis can be extended to determine the effect on profit of other changes, such as ______. a) whom to hire for replacement positions b) building design changes c) changes in income tax rates

C

On the CVP graph, the fixed-expense line is ______. a) a sloped line intersecting with the vertical axis b) parallel to the vertical axis c) parallel to the horizontal axis d) vertical to the horizontal axis

C

As compared with traditional CVP analysis, using an activity-based costing system for CVP ______. a) provides less useful information for managers b) assumes that sales revenue is linear c) can be misleading d) provides a more complete picture

D

When firms introduce advanced manufacturing systems, ______. a) the break-even point tends to decrease and the number of sales units required to earn a target profit tends to increase b) both the break-even point and the number of sales units required to earn a target profit tend to increase c) both the break-even point and the number of sales units required to earn a target profit tend to decrease d) the break-even point tends to increase and the number of sales units required to earn a target profit tends to decrease

D because the cost structure of an advanced manufacturing environment tends to have a larger proportion of fixed costs, thereby increasing the break-even point, but decreasing units required to earn a target profit.

True or false: When a change in one key variable causes a change in another key variable, the incremental approach cannot be used for the analysis.

False: As long as all changes are identified, the incremental approach can be used.

True or false: Sensitivity analysis is generally time consuming and cumbersome.

False: Due to widespread availability of computers and spreadsheet software, this is easy to do.

True or false: The first step in any cost-volume-profit analysis is to analyze whether costs are product or period related.

False: The first step is to determine if costs are fixed or variable.

The area between the total revenue and total cost lines, but above their intersection is called the __________ area.

Profit

The difference between budgeted sales revenue and break-even sales revenue is called the _______________ ______________.

Safety Margin

The relative proportion of each type of product sold is called the ___________ ___________.

Sales Mix

The difference between total sales revenue and total variable expenses is ______________ ___________ ______________.

Total contribution margin

On a profit-volume graph, the _______________ axis intercepts at the amount equal to fixed expenses at the zero activity level.

Vertical

Companies with high operating leverages have proportionally ______. a) higher fixed expenses b) lower contribution margin ratio c) higher contribution margin ratios d) lower fixed expenses

a and c

Operating managers frequently prefer the contribution income statement because it ______. a) separates fixed and variable expenses b) discloses gross margin from sales c) highlights CVP relationships d) clearly identifies period costs

a and c

Cost structure ______. a) has a significant effect of the sensitivity of profits to changes in volume b) is calculated by taking variable cost per unit time the number of units sold c) differs among industries, but is the same for companies within an industry d) is the relative proportion of fixed and variable costs

a and d

When using activity-based costing to perform CVP analysis, ______. a) better information is provided than with traditional CVP b) results may be misleading because costs are not well categorized c) results will be the same as under a traditional system d) a more complete picture of CVP relationships is presented

a and d

A company with a low operating leverage will have ______. a) low fixed costs b) low break-even point c) low safety margin d) high safety margin e) high break-even point f) high fixed costs

a, b, and d

After tax net income is ______. a) calculated as: (before tax income) - tax rate(before tax income) b) the amount of income remaining after subtracting the firm's income tax expense c) gross profit after subtracting the firm's income tax expense d) greater than before tax net income e) calculated as: (before tax income) x (1- tax rate)

a, b, and e

A contribution income statement shows ______. a) contribution margin b) net income c) a breakdown of expenses by cost behavior d) sales e) gross margin f) a breakdown of expenses by period and product costs

a, b, c, and d

In manufacturing and merchandising firms, traditional income statements show ______. a) a breakdown of expenses by period and product costs b) net income c) sales d) a breakdown of expenses by cost behavior e) gross margin f) contribution margin

a, b, c, and e

The assumption that the behavior of total expenses is a straight-line over the relevant range implies that ______. a) the variable cost per unit remains unchanged b) the revenue per unit increases as sales volume increases c) total fixed cost remain constant d) total revenue is a straight-line e) the number of units produced equals the number of units sold

a, c, d, and e

The trade-off of a high operating leverage is the risk of having ______. a) high variable costs per unit b) large committed fixed costs c) high break-even points d) less committed fixed costs

b and c

CVP analysis is used to determine the effects of ______. a) management changes on profits b) activity changes on costs c) selling price changes on profits d) cost changes on profits e) activity changes on revenues

b, c, d, and e

The assumption that the behavior of total expenses is a straight-line over the relevant range implies that ______. a) the revenue per unit increases as sales volume increases b) the number of units produced equals the number of units sold c) the variable cost per unit remains unchanged d) total fixed cost remain constant e) total revenue is a straight-line

b, c, d, and e

Operating managers usually prefer the ______________ income statement because it quickly shows how income will be affected by changes in sales volume.

contribution

The relative proportion of its fixed and variable costs is called the ________________ ________________ of an organization

cost structure

The contribution format highlights the distinction between ________________ and _______________ costs.

fixed and variable

When highly automated material-handling and production equipment is used to make a variety of similar products, a(n) _______________ _____________ system is in use

flexible manufacturing

The area between the total revenue and total cost lines, but below their intersection is called the ______ area.

loss

A firm with relatively high operating level will have a relatively ______ safety margin.

low

The extent to which an organization used fixed costs in its cost structure is shown by its ______.

operating leverage

Generating CVP analysis many times with different combinations of estimates for sales volume, sales prices, variable expenses and fixed expenses is called _____________ _____________.

sensitivity analysis

A statement that shows the gross margin for a company is an example of a(n) _______________ income statement.

traditional

The break-even point is __.

where revenues equal expenses