Unit 3: Concepts

A company with a low degree of operating leverage is at greater risk during downturns in the economy.

False. (lesser risk)

The breakeven point is the activity level where:

revenues equal the sum of variable and fixed costs.

The contribution margin is

the difference between sales and variable costs.

If actual sales equal break-even sales

the margin of safety equals zero.

On a cost-volume-profit graph, the break-even point is where

the revenue line intersects the total cost line.

If variable costs per unit decrease, sales volume at the break-even point will

decrease.

The margin of safety in dollars is

expected sales minus sales at break-even.

Breakeven point is:

fixed costs divided by contribution margin per unit.

In an actual cost system, actual direct materials, actual direct labor and estimated overhead are used to determine unit cost.

False

Contribution margin equals:

revenues minus variable costs.

The cost-volume profit graph depicts the relationships among cost, volume and profits, by plotting the total revenue line and the total cost line on the graph.

True

If fixed costs increase, the break-even point in units will

increase.

Sales can decline by how much before losses are incurred?

margin of safety

Which of the following can be considered a measure of risk in cost-volume-profit analysis?

margin of safety

The cost-volume-profit graph

plots the total revenue line and the total cost line.

A profit-volume graph visually portrays the relationship between

profits and units sold.

Operating leverage is

the use of fixed costs to extract higher percentage changes in profits as sales activity changes.

The break-even point is where total sales revenue equals total cost.

True.

If variable expenses decrease and the price increases, the break-even point decreases.

True

Managers can use CVP analysis to handle risk and uncertainty.

True

The contribution margin ratio can be calculated by subtracting the variable cost ratio from one.

True

To determine contribution margin use:

both variable manufacturing costs and variable nonmanufacturing costs.

The margin of safety is the difference between:

budgeted revenues and breakeven revenues.

Degree of operating leverage is calculated as

contribution margin/operating income

If the selling price per unit increases, the break-even point in units will

decrease.

At the break-even point,

total contribution margin equals total fixed cost.

The breakeven point decreases if

total fixed costs decrease.

Total revenues less total fixed costs equal the contribution margin.

False. (Total revenues less total variable costs equal the contribution margin.)

If one increases variable costs per unit, the break-even point will decrease.

False (If one increases variable costs per unit, the break-even point will increase.)

If fixed costs increase, the break-even point decreases.

False (same effect)

The breakeven point in CVP analysis is defined as:

fixed costs divided by the contribution margin per unit.

The contribution income statement highlights:

variable and fixed costs.

If the contribution margin per unit decreases, the break-even point in units

will increase.

If the break-even point increases, the margin of safety increases.

False.

Most firms would like to earn operating income equal to the break-even point.

False. (Greater)

If variable costs per unit increase, then the breakeven point will decrease.

False (variable costs -- same as breakeven point effect)

If a company increases fixed costs, then the breakeven point will be lower.

False.

The difference between total revenues and total variable costs is called contribution margin.

True

The impact on a firm's income resulting from a change in the number of units sold can be assessed by multiplying the unit contribution margin by the change in units sold assuming that fixed costs remain the same.

True

The profit-volume graph shows the relationship between operating income and the number of units sold.

True

The profit-volume graph shows the relationship between profits and units sold.

True

Companies with a greater proportion of fixed costs have a greater risk of loss than companies with a greater proportion of variable costs.

True.

The contribution margin income statement provides a good check to determine if the sale of a certain number of units really results in operating income of the given amount.

True.

The margin of safety measures the units sold or the revenue earned above the break-even volume.

True.