Chapter 5 Quiz

To obtain the dollar sales volume necessary to attain a given target profit, which of the following formulas should be used?

(Fixed expenses + Target net Profit)/Contribution margin ratio

In two companies making the same product and with the same total sales and total expenses, the contribution margin ratio will be lower in the company with a higher proportion of fixed expenses in its cost structure. T/F

False

Incremental analysis is an analytical approach that focuses only on those revenues and costs that will not change as a result of a decision. T/F

False

On a CVP graph for a profitable company, the total expense line will be steeper than the total revenue line. T/F

False

The break-even point can be determined by simply adding together all of the expenses from the income statement. T/F

False

The degree of operating leverage is computed by dividing sales by the contribution margin. T/F

False

To estimate what the profit will be at various levels of activity, multiply the number of units to be sold above or below the break-even point by the unit contribution margin. T/F

True

If the contribution margin is not sufficient to cover fixed expenses:

a loss occurs

If sales volume increases and all other factors remain constant, then the:

margin of safety will increase

If a company increases its selling price by $2 per unit due to an increase in its variable labor cost of $2 per unit, the break-even point in units will:

not change

Mossfeet Shoe Corporation is a single product firm. The company is predicting that a price increase next year will not cause unit sales to decrease. What effect would this price increase have on the following items for next year? Contribution Margin Ratio (Increase or Decrease) & Break-even Point (Increase or No Effect)

Contribution Margin Ration - Increase Break-even Point - Decrease

Which of the following is an assumption underlying standard CVP analysis?

In multi-product companies, the sales mix is constant

If the degree of operating leverage is 4, then a one percent change in quantity sold should result in a four percent change in:

Net operating income

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

The contribution margin ratio multiplied by the selling price per unit equals the contribution margin per unit.

A company with high operating leverage will experience a larger reduction in net operating income in a period of declining sales than a company with low operating leverage. T/F

True

A shift in the sales mix from high-margin items to low-margin items can cause total profits to decrease even though total sales may increase. T/F

True

A shift in the sales mix from products with high contribution margin ratios toward products with low contribution margin ratios will raise the break-even point for the company as a whole. T/F

True

For a capital intensive, automated company the break-even point will tend to be higher and the margin of safety will be lower than for a less capital intensive company with the same sales. T/F

True

If fixed expenses increase by $10,000 per year, then the sales needed to break even will generally increase by more than $10,000. T/F

True

If the variable expense per unit decreases, and all other factors remain the same, the contribution margin ratio will increase. T/F

True