Chapter 7

10. The break-even point may change when the sales mix changes.

10. True. A change in sales mix usually results in a change in the overall CM ratio. If the overall CM ratio changes, the break-even point will also change.

7. Margin of safety equals breakeven sales minus expected sales.

7. False. MOS = Actual Sales - Break-Event Sales

11. The degree of operating leverage remains the same at all sales levels.

11. False. The degree of operating leverage decreases as a firm moves further and further from its break-even point.

5. Contribution Margin is the result after deducting variable costs and fixed costs from total sales.

5. False. Sales - Variable Costs = CM

12. An operating leverage factor of 3.5 indicates that if sales volume increases by 1%, operating income will increase by 3.5%.

True

13. The break-even point will increase if fixed costs increase.

True

14. The contribution margin per unit is $13 for a company with a sales price per unit of $45, variable cost of $32 per unit, and fixed costs of $4 per unit.

True

4. The combination of products that make up total sales is known as the sales mix.

True

6. "What if" technique is a sensitivity analysis that predicts results when underlying assumptions are changed?

True

9. The break-even point can be expressed in both units sold and total sales dollars.

True

1. When a product has a higher unit contribution margin, it will also have a higher contribution margin ratio than other products.

1. False. The CM ratio is the unit contribution margin divided by the unit selling price. Once product might have a higher unit contribution than another, but is selling price may be lower.

15. Alpha Company has a contribution margin ratio of 0.35 and Beta Company has a contribution margin ratio of 0.45. Beta Company will have a higher break-even volume.

15. False. Beta Company will have a lower break-even volume. Since the contribution margin ratio is higher, there is a greater percentage of each sales dollar being available to absorb fixed costs and then to contribute to net income. Alpha Company contributes $0.35 of each dollar to fixed costs and net income while Beta Company contributes $0.45.

16. Once the break-even point has been reached, net income will increase by the unit contribution margin for each additional unit sold.

16. True. At the break-even point all fixes costs have been covered. All contribution margin generated from that point forward increases net income.

17. Incremental analysis focuses on the differences in costs and revenues between alternatives.

17. True. By definition, incremental analysis deals only with differences between alternatives.

18. If a company's cost structure shifts toward greater fixed costs and lower variable costs, one would expect the company's CM ratio to fall.

18. False. The reverse is true - one would expect the company's CM ratio to rise. Variable costs would be lower and hence the CM ratio would be higher.

19. One way to compute the break-even point is to divide total sales by the CM ratio.

19. False. Break-event point = Fixed Costs/CM Ratio

2. Cost-volume-profit analysis assumes the product sales mix may change.

2. False. C-V-P analysis assumes the sales mix will NOT change. The sales mix must remain constant.

20. When there is more than one product, a key assumption in break-even analysis is that the sales mix will not change.

20. True. A change in sales mix will change the break-even point.

3. For a given increase in sales dollars, a low CM ratio will result in a lower increase in profits than will a high CM ratio.

3. True. The CM ratio measures how much a sales dollar is translated into decreased or increased contribution margin and profit.

8. The break-even point occurs where the contribution margin is equal to total variable expenses.

8. False. The break-even point occurs where profit is zero and the contribution margin is equal to fixed expenses.