Cost CH. 3

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

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) Managers can lower operating risk by changing fixed costs to variable costs in the long-term.

Kanga Company is considering two different production plans. Option one: Fixed costs of $10,000 and a breakeven point of 500 units. Option two: Fixed costs of $20,000 and a breakeven point of 700 units. Which option should Kanga choose if it is expecting to produce 600 units? A) Option one. B) Option two. C) Both options are equally good. D) It isn't possible to determine from the information given.

A) Option one.

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) The total revenue line starts at the origin and the total costs line starts at the fixed intercept.

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) Total costs can be divided into a fixed component and a component that is variable with respect to the level of output.

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) a way of determining what will happen if assumptions change

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) increasing variable cost per unit

In the merchandising sector ________. A) only variable costs are subtracted to determine gross margin B) fixed overhead costs are subtracted to determine gross margin C) fixed overhead costs are subtracted to determine contribution margin D) all operating costs are subtracted to determine contribution margin

A) only variable costs are subtracted to determine gross margin

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) operating income is equal to zero

All else being equal, an increase in advertising expenditures will ________. A) reduce operating income B) reduce contribution margin C) increase variable costs D) increase selling price

A) reduce operating income

________ 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) A sensitivity analysis

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) The theory assumes that units manufactured equal units sold.

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) Total revenues and total costs are linear in relation to output units.

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) any factor that affects revenues

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) budgeted revenues and breakeven revenues

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) dividing net income by 1 − tax rate

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) fixed costs by contribution margin percentage

In the manufacturing sector, ________. A) only variable costs are subtracted to determine gross margin B) fixed overhead costs are subtracted to determine gross margin C) fixed overhead costs are subtracted to determine contribution margin D) all operating costs are subtracted to determine contribution margin

B) fixed overhead costs are subtracted to determine gross margin

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) identifying the variable and fixed costs

Gross margin is ________. A) sales revenue less variable costs B) sales revenue less cost of goods sold C) contribution margin less fixed costs D) contribution margin less variable costs

B) sales revenue less cost of goods sold

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 total fixed costs decrease

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) analyse a firm's profitability and help to decide wealth distribution among its stakeholders

B) to study the behavior of and relationship among the elements such as total revenues, total costs, and income

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) when demand is low the risk of loss is high

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) where contribution margin equals fixed costs

Which of the following statements about net income (NI) is true? A) NI = operating income plus nonoperating revenue. B) NI = operating income plus operating costs. C) NI = operating income less income taxes. D) NI = operating income less cost of goods sold.

C) NI = operating income less income taxes.

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) Net income is operating income plus nonoperating revenues minus nonoperating costs minus income taxes.

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) fixed costs divided by contribution margin per unit

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) Only selling price, variable cost per unit, and total fixed costs are known and constant.

Service companies and not-for-profit organizations ________. A) cannot use CVP because they don't manufacture a product B) cannout use CVP because there is no way to distinguish fixed and variable costs C) can use CVP by focusing on measuring the organization's output D) can use CVP by treating all costs as variable

C) can use CVP by focusing on measuring the organization's output

If a company is planning to reduce the selling price, they must believe that ________. A) variable costs will decline as well B) the fixed costs will cover the lower sales price C) more units will be sold D) increased collections will increase income

C) more units will be sold

Which of the following is an output measure for a hospital? A) number of doctors needed to cater to patients B) number of patients admitted every day in a hospital C) number of days spent by a patient in a hospital D) charges applicable on the number of days spent by a patient in a hospital

C) number of days spent by a patient in a hospital

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

C) revenues minus variable costs

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) selling price - variable costs per unit

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) will not change the breakeven point

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) variable and fixed costs

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) can be used to predict operating income at different levels of activity

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) contribution margin per unit

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) increase its fixed costs relative to its variable costs

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) less risk is assumed than in a highly leveraged firm

To apply CVP analysis in a not-for profit organization ________. A) managers need to focus on the customer base rather than the cost drivers B) managers need to focus on measuring their output, which is the same as tangible units sold by manufacturing and merchandising companies C) managers need to focus on measuring their input, which is different from the tangible units consumed by manufacturing and merchandising companies D) managers need to focus on measuring their output, which is different from the tangible units sold by manufacturing and merchandising companies

D) managers need to focus on measuring their output, which is different from the tangible units sold by manufacturing and merchandising companies

Assume only the specified parameters change in a cost-volume-profit analysis. If the contribution margin increases by $6 per unit, then ________. A) fixed costs increases by $6 per unit B) operating income decreases by $6 per unit C) fixed costs decreases by $6 per unit D) operating income increases by $6 per unit

D) operating income increases by $6 per unit

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) operating income will decrease

If a company has a degree of operating leverage of 5 and sales increase by 30%, then ________. A) total fixed costs will increase by 150% B) total costs will increase by 150% C) profit will increase by 120% D) profit will increase by 150%

D) profit will increase by 150%

All else being equal, a reduction in selling price will ________. A) increase contribution margin B) reduce fixed costs C) increase variable costs D) reduce operating income

D) reduce operating income

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) revenues equal the sum of variable and fixed costs

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) there will be a profit

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) variable costs per unit decrease