ACCY 309 Chapter 3

When a company has the least fixed costs, the company is operating at a very high operating leverage.

F

In the graph method of CVP analysis, ________. A) The total revenue line starts at the origin and the total costs line starts at the fixed intercept. B) The operating income line starts at the origin and the total costs line starts at the fixed intercept. C) The breakeven point is at the fixed intercept where the total revenues line intersects. D) The operating income area is the section where the total costs line is above the total revenues line.

A

Sensitivity analysis is ________. A) a way of determining what will happen if assumptions change B) a way of seeing how employees will be affected by changes C) a way of determining how customers will react to new products D) a way of seeing how far from budget actual results are

A

Which of the following is an assumption of CVP analysis? A) Total costs can be divided into a fixed component and a component that is variable with respect to the level of output. B) When graphed, total costs curve upward. C) The unit-selling price is variable as it is subject to demand and supply. D) Total costs can be divided into inventoriable and period costs with respect to the level of output.

A

Which of the following is the mathematical expression of contribution margin ratio? A) Contribution margin ratio = Contribution margin percentage × Revenues (in dollars) B) Contribution margin ratio = Contribution margin percentage × Fixed costs (in dollars) C) Contribution margin ratio = Contribution margin percentage × Variable costs (in dollars) D) Contribution margin ratio = Contribution margin percentage × Operating leverage

A

Which of the following statements is true? A) Managers can lower operating risk by changing fixed costs to variable costs in the long-term. B) Managers can lower operating risk by changing variable costs to fixed costs in the long-term. C) Managers can lower operating risk by reducing the selling price and increasing volume. D) Managers can lower operating risk by increasing the selling price and reducing volume.

A

A revenue driver is defined as ________. A) any factor that affects costs and revenues B) any factor that affects revenues C) the only factor that can influence a change in selling price D) the only factor that can influence a change in demand

B

Managers use cost-volume-profit (CVP) analysis to ________. A) forecast the cost of capital for a given period of time B) to study the behavior of and relationship among the elements such as total revenues, total costs, and income C) estimate the risks associated with a given job D) analyze a firm's profitability and help to decide wealth distribution among its stakeholders

B

One of the first steps to take when using CVP analysis to help make decisions is ________. A) calculating the break-even point B) identifying the variable and fixed costs C) calculation of the degree of operating leverage for the company D) estimating the volume of sales to make a good profit

B

The breakeven point decreases if ________. A) the variable cost per unit increases B) the total fixed costs decrease C) the contribution margin per unit decreases D) the selling price per unit decreases

B

The breakeven point is . A) where selling one more unit will not increase income B) where contribution margin equals fixed costs C) where total revenues equal contribution margin D) fixed costs divided by revenues equals zero

B

The breakeven point revenues is calculated by dividing ________. A) fixed costs by total revenues B) fixed costs by contribution margin percentage C) total revenues by fixed costs D) contribution margin percentage by fixed costs

B

The margin of safety is the difference between ________. A) budgeted expenses and breakeven expenses B) budgeted revenues and breakeven revenues C) actual operating income and budgeted operating income D) actual sales margin and budgeted sales margin

B

The planned operating income is calculated by ________. A) dividing net income by tax rate B) dividing net income by 1 − tax rate C) multiplying net income by tax rate D) multiplying net income by 1 − tax rate

B

When a greater proportion of costs are fixed costs, then ________. A) a small increase in sales results in a small decrease in operating income B) when demand is low the risk of loss is high C) a decrease in sales reduces the total fixed cost per unit D) a decrease in sales reduces the cost per unit

B

Which of the following is true of CVP analysis? A) Costs may be separated into separate inventoriable and period components with respect to the level of output. B) Total revenues and total costs are linear in relation to output units. C) Unit selling price, unit variable costs, and unit fixed costs are known and remain constant. D) Proportion of different products will vary according to demand and supply when multiple products are sold.

B

Which of the following is true of cost-volume-profit analysis? A) The theory assumes that all costs are variable. B) The theory assumes that units manufactured equal units sold. C) The theory states that total variable costs remain the same over a relevant range. D) The theory states that total costs remain the same over the relevant range.

B

________ is the process of varying key estimates to identify those estimates that are the most critical to a decision. A) The graph method B) A sensitivity analysis C) The degree of operating leverage D) Sales mix

B

The contribution margin per unit equals . A) fixed cost - contribution margin ratio B) selling price - fixed costs per unit C) selling price - variable costs per unit D) selling price - costs of goods sold

C

Which of the following is true about the assumptions underlying basic CVP analysis? A) Selling price varies with demand and supply of the product. B) Only selling price and variable cost per unit are known and constant. C) Only selling price, variable cost per unit, and total fixed costs are known and constant. D) Selling price, variable cost per unit, fixed cost per unit, and total fixed costs are known and constant.

C

Which of the following is true of net income? A) Net income is operating income divided by income tax rate. B) Net income is operating income plus operating revenues minus operating costs minus income taxes. C) Net income is operating income plus nonoperating revenues minus nonoperating costs minus income taxes. D) Net income is operating income minus nonoperating revenues minus nonoperating costs minus sales taxes.

C

Assume only the specified parameters change in a CVP analysis. The contribution margin percentage increases when ________. A) total fixed costs increase B) total fixed costs decrease C) variable costs per unit increase D) variable costs per unit decrease

D

If a company would like to increase its degree of operating leverage it should ________. A) increase its sales relative to its fixed costs B) increase its sales relative to its variable costs C) increase its variable costs relative to its fixed costs D) increase its fixed costs relative to its variable costs

D

If unit outputs exceed the breakeven point ________. A) there will be an increase in fixed costs B) total sales revenue will exceed fixed costs C) total sales revenue will exceed variable costs D) there will be a profit

D

In a company with low operating leverage, ________. A) fixed costs are more than the contribution margin B) contribution margin and operating income are inversely related C) there is a higher possibility of net loss than a higher-leveraged firm D) less risk is assumed than in a highly leveraged firm

D

In multiproduct situations, when sales mix shifts toward the product with the lowest contribution margin then ________. A) total revenues will increase B) interest cost will decrease C) total contribution margin will increase D) operating income will decrease

D

The breakeven point is the activity level where ________. A) revenues equal fixed costs B) revenues equal variable costs C) contribution margin equals total costs D) revenues equal the sum of variable and fixed costs

D

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

F

If planned net income is $30,000 and the tax rate is 30%, then planned operating income would be $39,000.

F

If the sales mix shifts toward the lower-contribution-margin product, the breakeven quantity will decrease.

F

In the graph method of CVP analysis, the horizontal line above the x-axis represents the total cost line.

F

Only variable production costs are used when calculating contribution margin.

F

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

F

The margin of safety refers to how many more sales are needed in order to breakeven,

F

The shorter the time horizon, the lower the percentage of total costs considered fixed.

F

A revenue driver is a variable, such as volume, that causally affects revenues.

T

Contribution margin percentage equals the unit contribution margin divided by the selling price.

T

If a company's breakeven revenue is $1,000 and its budgeted revenue is $1,250, then its margin of safety percentage is 20%.

T

The degree of operating leverage at a specific level of sales helps the managers calculate the effect that potential changes in sales will have on operating income.

T

The three methods used to study CVP analysis are graph method, contribution method, and equation method.

T

To calculate the breakeven point in a multiproduct situation, one must assume that the sales mix of the various products remains constant.

T

You can find the breakeven revenues using total revenues, total variable costs, and total fixed costs; you don't need unit prices and costs.

T

Contribution Margin = Total revenues - Total variable costs

T

Contribution margin = Contribution margin percentage × Revenues (in dollars).

T

Contribution margin per unit equals contribution margin divided by number of units sold.

T

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

T

The risk-return tradeoff across alternative cost structures can be measured as operating leverage.

T

The contribution income statement highlights ________. A) gross margin B) the segregation of costs into period costs and inventoriable costs C) different product lines D) variable and fixed costs

D

The contribution margin income statement ________. A) reports gross margin B) is allowed for external reporting to shareholders C) categorizes costs as either direct or indirect D) can be used to predict operating income at different levels of activity

D

The selling price per unit less the variable cost per unit is the ________. A) fixed cost per unit B) gross margin C) margin of safety D) contribution margin per unit

D

A firm operating at breakeven point will pay an income tax of 10%.

F

An increase in the tax rate will increase the breakeven point.

F

Companies that are substituting variable costs for fixed costs receive a greater per unit return above the breakeven point.

F

In CVP analysis, the graph of total revenues versus total costs is linear in nature relation to units sold within a relevant range and time period.

T

In most multiproduct situations when sales mix shifts toward the product with the highest contribution margin, operating income will be higher.

T

In multiproduct situations, when sales mix shifts toward the product with the lowest contribution margin, the operating income will be lower.

T

In the profit-volume graph the point at which the profit-volume line and x-axis intersect is the breakeven point.

T

Operating income plus total fixed costs equals the contribution margin.

T

Sales mix is the quantities or proportion of various products or services that constitute a company's total unit sales.

T

Sensitivity analysis is a simple approach to recognizing uncertainty.

T

The classification of costs as variable and fixed depends on the relevant range, the length of the time horizon, and the specific decision situation.

T

All else being constant, an increase in operating income will result in an increase in net income.

T

At breakeven point, ________. A) operating income is equal to zero B) contribution margin minus fixed costs is equal to profits earned C) revenues equal fixed costs minus variable costs D) breakeven revenues equal fixed costs divided by the variable cost per unit

A

Which of the following will increase a company's breakeven point? A) increasing variable cost per unit B) increasing contribution margin per unit C) reducing its total fixed costs D) increasing the selling price per unit

A

Breakeven point in units is ________. A) total costs divided by profit margin per unit B) contribution margin per unit divided by total cost per unit C) fixed costs divided by contribution margin per unit D) the sum of fixed and variable costs divided by contribution margin per unit

C

Contribution margin equals ________. A) revenues minus period costs B) revenues minus product costs C) revenues minus variable costs D) revenues minus fixed costs

C

In CVP analysis, focusing on target net income rather than operating income ________. A) will increase the breakeven point B) will decrease the breakeven point C) will not change the breakeven point D) will help managers construct a better capital policy

C

Companies with a greater proportion of direct costs have a greater risk of loss than companies with a greater proportion of indirect costs.

F

Contribution margin = Total revenues - Total manufacturing costs

F

A company with a higher degree of operating leverage is at greater risk during economic downturns because of its higher fixed costs.

T

A profit-volume graph shows the impact on operating income from changes in the output level.

T