ACCT 2301 Ch. 4 Concepts

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

False

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

False

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

False

Managers can use CVP analysis to handle risk and uncertainty.

True

The margin of safety in dollars is

expected sales minus sales as break-even.

Sales can decline by how much before losses are incurred?

margin of safety

The contribution margin is:

the difference between sales and variable costs.

Breakeven point is:

fixed costs divided by contribution margin per unit

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

increase

The cost-volume-profit graph

plots the total revenue line and the total cost line.

The break-even point is when

total revenue equals total cost.

The contribution income statement highlights:

variable and fixed costs

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

will increase.

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

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

True

At the break-even point,

total contribution margin equals total fixed cost.

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

True

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

increase.

Which of the following will increase a company's breakeven point?

increasing variable cost per unit

A profit-volume graph visually portrays the relationship between

profits and units sold.

The breakeven point is the activity level where:

revenues equal the sum of variable and fixed costs

Contribution margin equals:

revenues minus variable costs

A "what-if" technique that examines the impact of changes in underlying assumptions on a result is

sensitivity analysis.

If actual sales equal break-even sales

the margin of safety equals zero.

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

True

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

True

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

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

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

False

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

False

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

False

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

False

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

False

Total revenues less total fixed costs equal the contribution margin.

False

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

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

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

the revenue line intersects the total cost line.

Operating leverage is

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

The breakeven point decreases if:

total fixed costs decrease

Which is the equation for operating income?

(Price x Units sold) - (Unit variable cost x Units sold) - Fixed cost

Degree of operating leverage is calculated as

Contribution margin/ Operating income

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

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

decrease.

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

decrease.

The breakeven point in CVP analysis is defined as:

fixed costs divided by the contribution margin per unit