Chapter 5

If fixed expenses increase by $10,000 per year, then the level of sales needed to break even will also increase by $10,000. True False

False

If two companies produce the same product and have the same total sales and same total expenses, operating leverage will be lower in the company with a higher proportion of fixed expenses in its cost structure. True False

False

Mark Company currently sells a video recorder with a selling price of $300 per unit. The variable expense per unit is $175 and fixed expenses are $100,000. If the company reduces variable expenses by $20 per unit and increases the fixed expenses by $10,000, the break-even point will increase. True False

False

Reynold Enterprises sells a single product for $25. The variable expense per unit is $15 and the fixed expense per unit is $5 at the current level of sales. The company's net operating income will increase by $5 if one more unit is sold.

False

The break-even point in units can be obtained by dividing total fixed expenses by the contribution margin ratio. True False

False

A company with a degree of operating leverage of 4 would expect net operating income to increase by 200% if sales increased from $100,000 to $150,000. True False

True

A shift in the sales mix from products with a low contribution margin ratio toward products with a high contribution margin ratio will lower the break-even point in the company as a whole. True False

True

At the break-even point: Sales - Variable expenses = Fixed expenses. True False

True

For a given level of sales, a low contribution margin ratio will produce less net operating income than a high contribution margin ratio.

True

If the fixed expenses increase in a company, and all other factors remain unchanged, then one would expect the margin of safety to decrease. True False

True

If two companies have the same total sales and total expenses and make the same product, the volatility of net operating income with changes in sales will tend to be greater in the company with a higher proportion of fixed expenses in its cost structure. True False

True

Incremental analysis is an analytical approach that focuses only on those revenues and costs that will change as a result of a decision

True

On a CVP graph for a profitable company, the total expense line will be steeper than the line representing fixed costs.

True

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

True

The impact on net operating income of a given dollar change in sales can be computed by applying the contribution margin ratio to the dollar change in sales. True False

True

The margin of safety percentage is equal to the margin of safety in dollars divided by total sales in dollars. True False

True

The total volume in sales dollars that would be required to attain a given target profit is determined by dividing the sum of the fixed expenses and the target profit by the contribution margin ratio. True False

True

The variable expense per unit is $12 and the selling price per unit is $40. Then the contribution margin ratio is 70%. True False

True