Accy 309 Exam 2
Companies that are substituting fixed costs for variable costs receive a greater per unit return above the breakeven point.
T
Companies with a greater proportion of fixed costs have a greater risk of loss than companies with a greater proportion of variable costs.
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Contribution margin = Contribution margin percentage × Revenues (in dollars)
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Contribution margin per unit equals contribution margin divided by number of units sold
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Contribution margin percentage = Contribution margin / revenues OR Contribution margin per unit = Selling price - Variable cost per unit
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Contribution margin percentage equals the unit contribution margin divided by the selling price
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Gross Margin = Total revenues - Total manufacturing costs OR Contribution Margin = Total Revenue - Total variable costs
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If a company increases fixed costs, then the breakeven point will be higher
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If contribution margin decreases by $1 per unit, then operating profits will decrease by $1 per unit.
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If the sales mix shifts toward the lower-contribution-margin product the breakeven quantity will increase.
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If variable costs per unit increase, then the breakeven point will also increase.
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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.
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In most multiproduct situations when sales mix shifts toward the product with the highest contribution margin, operating income will be higher.
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In multiproduct situations, when sales mix shifts toward the product with the lowest contribution margin, the operating income will be lower.
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In the graph method of CVP analysis, the horizontal line above the x-axis represents the fixed cost line.
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In the profit-volume graph the point at which the profit-volume line and x-axis intersect is the breakeven point
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Margin of safety refers to how many sales are in excess of breakeven
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Operating income plus total fixed costs equals the contribution margin
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Sales mix is the quantities or proportion of various products or services that constitute a company's total unit sales.
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Sensitivity analysis is a simple approach to recognizing uncertainty
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The classification of costs as variable and fixed depends on the relevant range, the length of the time horizon, and the specific decision situation.
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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.
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The difference between total revenues and total variable costs is called contribution margin
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The risk-return tradeoff across alternative cost structures can be measured as operating leverage.
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The shorter the time horizon, the higher the percentage of total costs considered fixed.
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The three methods used to study CVP analysis are graph method, contribution method, and equation method
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There is a difference between a good decision and a good outcome and one can exist without the other.
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To calculate the breakeven point in a multiproduct situation, one must assume that the sales mix of the various products remains constant.
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When a company has the least fixed costs, the company is operating at a low operating leverage
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You can find the breakeven revenues using total revenues, total variable costs, and total fixed costs; you don't need unit prices and costs
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all variable costs, production and selling/admin, are subtracted from revenue to determine contribution margin
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company with a higher degree of operating leverage is at greater risk during economic downturns because of its higher fixed costs
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revenue driver is a variable, such as volume, that causally affects revenues
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Which of the following is true of cost-volume-profit analysis?
The theory assumes that units manufactured equal units sold.
In the graph method of CVP analysis, ________.
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?
Total costs can be divided into a fixed component and a component that is variable with respect to the level of output.
Which of the following is true of CVP analysis?
Total revenues and total costs are linear in relation to output units.
Assume the sales mix consists of three units of Product A and one unit of Product B. If the sales mix shifts to four units of Product A and one unit of Product B, then the breakeven point will ________.
increase
If a company would like to increase its degree of operating leverage it should ________
increase its fixed costs relative to its variable costs
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
increasing variable cost per unit
In a company with low operating leverage, ________.
less risk is assumed than in a highly leveraged firm
To apply CVP analysis in a not-for profit organization ________.
managers need to focus on measuring their output, which is different from the tangible units sold by manufacturing and merchandising companies
If a company is planning to reduce the selling price, they must believe that
more units will be sold
Which of the following is an output measure for a hospital?
number of days spent by a patient in a hospital
In the merchandising sector ________
only variable costs are subtracted to determine gross margin
ssume only the specified parameters change in a cost-volume-profit analysis. If the contribution margin increases by $6 per unit, then _______
operating income increases by $6 per unit
At breakeven point, ________.
operating income is equal to zero
In multiproduct situations, when sales mix shifts toward the product with the lowest contribution margin then ________.
operating income will decrease
All else being equal, a reduction in selling price will _______
reduce operating income
All else being equal, an increase in advertising expenditures will ______
reduce operating income
Contribution margin equals ________
revenues minus variable costs
Gross margin is ________.
sales revenue less cost of goods sold
The contribution margin per unit equals
selling price - variable costs per unit
The breakeven point decreases if ________.
the total fixed costs decrease
If unit outputs exceed the breakeven point _______
there will be a profit
Managers use cost-volume-profit (CVP) analysis to ________.
to study the behavior of and relationship among the elements such as total revenues, total costs, and income
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
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.
A firm operating at breakeven point will pay an income tax of 10%
F
A planned increase in advertising would be considered an increase in variable costs in CVP analysis.
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
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
Contribution margin percentage = Selling price - Variable cost per unit
F
If a company increases fixed costs, then the breakeven point will be lower
F
If contribution margin decreases by $1 per unit, then operating profits will increase by $1 per unit.
F
If the sales mix shifts toward the lower-contribution-margin product, the breakeven quantity will decrease.
F
If variable costs per unit increase, then the breakeven point 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 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
Gross Margin will always be greater than contribution margin.
F. If variable costs are low and/or manufacturing fixed costs are high, then contribution margin can easily be greater than gross margin.
Which of the following is true of net income?
Net income is operating income plus nonoperating revenues minus nonoperating costs minus income taxes
A change in the tax rate will not change the breakeven point
T
A decision table is a summary of the alternative actions, events, outcomes, and probabilities of events
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A firm operating at breakeven point will not pay income tax as operating income is $0.
T
A planned decrease in selling price would be expected to cause an increase in the quantity sold.
T
A planned increase in advertising would be considered an increase in fixed costs in CVP analysis.
T
A profit-volume graph shows the impact on operating income from changes in the output level.
T
A) Contribution margin ratio = Contribution margin percentage × Revenues (in dollars)
T
All else being constant, an increase in operating income will result in an increase in net income
T
Sensitivity analysis is ________.
a way of determining what will happen if assumptions change
A revenue driver is defined as ________.
any factor that affects revenues
The margin of safety is the difference between ________.
budgeted revenues and breakeven revenues
The contribution margin income statement _______
can be used to predict operating income at different levels of activity
Service companies and not-for-profit organizations ________.
can use CVP by focusing on measuring the organization's output
The selling price per unit less the variable cost per unit is the ________.
contribution margin per unit
Assume the sales mix consists of three units of Product A and one unit of Product B. If the sales mix shifts to four units of Product A and one unit of Product B, then the weighted-average contribution margin will ________
decrease per unit
The planned operating income is calculated by ________
dividing net income by 1 − tax rate
The breakeven point revenues is calculated by dividing ________.
fixed costs by contribution margin percentage
Breakeven point in units is ________.
fixed costs divided by contribution margin per unit
In the manufacturing sector, ________.
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 ________.
identifying the variable and fixed costs
The contribution income statement highlights ________.
variable and fixed costs
Assume only the specified parameters change in a CVP analysis. The contribution margin percentage increases when ________.
variable costs per unit decrease
When a greater proportion of costs are fixed costs, then _______
when demand is low the risk of loss is high
The breakeven point is .
where contribution margin equals fixed costs
In CVP analysis, focusing on target net income rather than operating income ________.
will not change the breakeven point
