Chapter 5 Cost-Volume-Profit Relationships

At the break-even point, variable expenses and fixed expenses are equal. 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

The difference between the current level of sales and the sales at the break-even point is called the: sales mix margin of safety operating leverage contribution margin gross margin

margin of safety

The difference between total sales in dollars and total variable expenses is called: net operating income. net profit. the gross margin. the contribution margin.

the contribution margin.

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

true

Cost-Volume-Profit Analysis (CVP)

Examines the behavior of total revenues, total costs, and operating income as changes occur in the units sold, the selling price, the variable cost per unit, or the fixed costs of a product.

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 or False

False

With regard to the CVP graph, which of the following statements is not correct? The CVP graph assumes that volume is the only factor affecting total cost. The CVP graph assumes that selling prices do not change. The CVP graph assumes that variable costs go down as volume goes up. The CVP graph assumes that fixed expenses are constant in total within the relevant range.

The CVP graph assumes that variable costs go down as volume goes up.

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 or False

True

A contribution format income statement emphasizes _____. cost type (product vs. period) cost behavior (fixed vs. variable)

cost behavior (fixed vs. variable)

On a cost-volume-product graph, the revenue line will be shown above the total expense line for any activity level above the break-even point. True False

true

The contribution margin ratio measures the effect on the total contribution margin of a given change in total sales. True False

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

true

On a cost-volume-product graph, the break-even point is located: at the origin. where the total revenue line intersects the volume axis. where the total expenses line intersects the dollars axis. where the total revenue line intersects the total expenses line

where the total revenue line intersects the total expenses line.

To obtain the break-even point in terms of dollar sales, total fixed expenses are divided by which of the following? Variable expense per unit. Variable expense per unit/Selling price per unit. Fixed expense per unit. (Selling price per unit - Variable expense per unit)/Selling price per unit.

(Selling price per unit - Variable expense per unit)/Selling price per unit.

Which of the following is true regarding the contribution margin ratio of a single product company? As fixed expenses decrease, the contribution margin ratio increases. The contribution margin ratio multiplied by the variable expense per unit equals the contribution margin per unit. If sales increase, the dollar increase in net operating income can be computed by multiplying the contribution margin ratio by the dollar increase in sales. The contribution margin ratio increases as the number of units sold increases.

If sales increase, the dollar increase in net operating income can be computed by multiplying the contribution margin ratio by the dollar increase in sales.

The margin of safety is equal to: Sales - Net operating income. Sales - (Variable expenses/Contribution margin). Sales - (Fixed expenses/Contribution margin ratio). Sales - (Variable expenses + Fixed expenses).

Sales - (Fixed expenses/Contribution margin ratio)

A traditional format income statement emphasizes _____. cost type (product vs. period) cost behavior (xed vs. variable)

cost type (product vs. period)

The level of sales at which the company's profit is zero is called the: sales mix break-even point gross margin contribution margin margin of safety

break-even point

The ratio of fixed expenses to the unit contribution margin is the: break-even point in unit sales. profit margin. contribution margin ratio. margin of safety.

break-even point in unit sales.

The ratio of fixed expenses to the unit contribution margin is the: break-even point in unit sales. product margin. contribution margin ratio. margin of safety.

break-even point in unit sales.

If company A has a higher degree of operating leverage than company B, then: company A has higher variable expenses. company A's profits are more sensitive to percentage changes in sales. company A is more profitable. company A is less risky.

company A's profits are more sensitive to percentage changes in sales.

The degree of operating leverage can be calculated as: contribution margin divided by sales. gross margin divided by net operating income. net operating income divided by sales. contribution margin divided by net operating income.

contribution margin divided by net operating income.

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. True False

false

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

false

A contribution format income statement is used primarily for _____. external reporting internal decision making

internal decision making

The difference between the current level of sales and the sales at the break-even point is called the: gross margin contribution margin operating leverage sales mix margin of safety

margin of safety