M.ACTG Chapter 5 Smart Book

True or false: The sales mix must be taken into consideration when calculating the break-even point for more than one product due to different selling prices, costs, and contribution margins among the products.

True

Net operating income equals:

(unit sales - unit sales to break even) × unit contribution margin.

The term used for the relative proportion in which a company's products are sold is Blank______.

sales mix

Company A has a contribution margin ratio of 35%. For each dollar in sales, contribution margin will increase by Blank______.

$0.35

Place the following items in the correct order in which they appear on the contribution margin format income statement.

1. Sales 2. Variable Expenses 3. Contribution Margin 4. Fixed Expenses 5. Net Operating Income

The break-even point is the level of sales at which the profit equals:

Zero, 0, Nothing

Contribution margin:

becomes profit after fixed expenses are covered.

Margin of safety in dollars is Blank______.

budgeted (or actual) sales minus break-even sales

When a company sells one unit above the number required to break-even, the company's net operating income will ______.

change from zero to a net operating profit

The degree of operating leverage = Blank______.

contribution margin ÷ net operating income

The calculation of contribution margin (CM) ratio is Blank______.

contribution margin ÷ sales

The break-even point calculation is affected by Blank______.

costs per unit sales mix selling price per unit

Assuming sales price remains constant, an increase in the variable cost per unit will ______ the contribution margin per unit.

decrease

Once the break-even point is reached, the sale of an additional unit increases contribution margin by an amount that is ______ the increase in net operating income.

equal to

CVP analysis allows companies to easily identify the change in profit due to changes in Blank______.

volume product mix selling price

When constructing a CVP graph, the vertical axis represents:

Dollars

The margin of safety is the excess of break-even sales dollars over budgeted (or actual) sales dollars.

False

True or false: Knowledge of previous sales is necessary when using incremental analysis to evaluate a change in profits.

False

True or false: Without knowing the future, it is best to have a cost structure with high variable costs.

False

Which of the following statements is correct?

The higher the margin of safety, the lower the risk of incurring a loss.

According to the CVP analysis model and assuming all else remains the same, profits would be increased by a(n):

decrease in the unit variable cost.

The measure of how a percentage change in sales affects profits at any given level of sales is the Blank______.

degree of operating leverage

When a company produces and sells multiple products Blank______.

each product most likely has different costs each product most likely has a unique contribution margin a change in the sales mix will most likely change the break-even point

Contribution margin:

equals sales minus fixed expenses.

When the analysis of a change in profits only considers the costs and revenues that will change as the result of the decision, the decision is being made using:

incremental

A company with a high ratio of fixed costs:

is more likely to experience a loss when sales are down than a company with mostly variable costs. is more likely to experience greater profits when sales are up than a company with mostly variable costs.

Operating leverage is a measure of how sensitive Blank______ is to a given percentage change in sales dollars.

net operating income

Terry's Trees has reached its break-even point and has a contribution margin ratio of 70%. For each $1 increase in sales Blank______.

net operating income will increase by $0.70 total contribution margin will increase by $0.70

The contribution margin as a percentage of sales is referred to as the contribution margin or CM

ratio

The break-even point is reached when the contribution margin is equal to:

total fixed expenses.

At the break-even point ______.

total revenue equals total cost net operating income is zero

When preparing a CVP graph, the horizontal axis represents:

unit volume.

The contribution margin equals sales minus all Blank______ expenses.

variable

The contribution margin is equal to sales minus ______.

variable expenses

Profit equals:

(P × Q - V × Q) - fixed expenses.