## 58 terms

### One way to compute the total contribution margin is to add total fixed expenses to net operating income.

True

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

True

### In two companies making the same product and with the same total sales and total expenses, the contribution margin ratio will be lower in the company with a higher proportion of fixed expenses in its cost structure.

False

### If the variable expense per unit increases, and all other factors remain constant, the contribution margin ratio will increase.

false

### The impact on net operating income of any given dollar change in total sales can be estimated by multiplying the CM ratio by the dollar change in total sales.

true

### A company with sales of $70,000 and variable expenses of $40,000 should spend $10,000 on increased advertising if the increased advertising will increase sales by $20,000.

false

### The formula for the break-even point is the same as the formula to attain a given target profit for the special case where the target profit is zero.

true

### An increase in total fixed expenses will not affect the break-even point so long as the contribution margin ratio remains unchanged.

false

### All other things the same, a reduction in the variable expense per unit will cause the break-even point to rise.

false

### The unit sales volume necessary to reach a target profit is determined by dividing the target profit by the contribution margin per unit.

false

### All other things the same, the margin of safety in dollars at a given level of sales will tend to be lower for a capital-intensive company than for a labor-intensive company with high variable expenses.

true

### The margin of safety in dollars equals the excess of budgeted (or actual) sales over the break-even volume of sales.

true

### A company with high operating leverage will experience a lower reduction in net operating income in a period of declining sales than will a company with low operating leverage.

false

### If Q is the quantity of a product sold, P is the price per unit, V is the variable expense per unit, and F is the total fixed expense, then the degree of operating leverage is equal to: [Q(P-V)] ÷ [Q(P-V)-F]

true

### A shift in the sales mix from products with high contribution margin ratios toward products with low contribution margin ratios will raise the break-even point.

true

###
Contribution margin can be defined as:

A) the amount of sales revenue necessary to cover variable expenses.

B) sales revenue minus fixed expenses.

C) the amount of sales revenue necessary to cover fixed and variable expenses.

D) sales revenue minus variable expenses.

sales revenue minus variable expenses.

###
Which of the following statements is correct with regard to a CVP graph?

A) A CVP graph shows the maximum possible profit.

B) A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.

C) A CVP graph assumes that total expense varies in direct proportion to unit sales.

D) A CVP graph shows the operating leverage as the gap between total sales revenue and total expense at the actual level of sales.

A CVP graph shows the break-even point as the intersection of the total sales revenue line and the total expense line.

###
If both the fixed and variable expenses associated with a product decrease, what will be the effect on the contribution margin ratio and the break-even point, respectively?

Contribution margin ratio Break-even point

A) Decrease Increase

B) Increase Decrease

C) Decrease Decrease

D) Increase Increase

B) increase and decrease

###
Which of the following is true regarding the contribution margin ratio of a single product company?

A) As fixed expenses decrease, the contribution margin ratio increases.

B) The contribution margin ratio multiplied by the selling price per unit equals the contribution margin per unit.

C) The contribution margin ratio will decline as unit sales decline.

D) The contribution margin ratio equals the selling price per unit less the variable expense ratio.

B) The contribution margin ratio multiplied by the selling price per unit equals the contribution margin per unit.

###
If a company is operating at the break-even point:

A) its contribution margin will be equal to its variable expenses.

B) its margin of safety will be equal to zero.

C) its fixed expenses will be equal to its variable expenses.

D) its selling price will be equal to its variable expense per unit.

B) its margin of safety will be equal to zero.

###
At the break-even point:

A) sales would be equal to contribution margin.

B) contribution margin would be equal to fixed expenses.

C) contribution margin would be equal to net operating income.

D) sales would be equal to fixed expenses.

B) contribution margin would be equal to fixed expenses.

###
The break-even point would be increased by:

A) a decrease in total fixed expenses.

B) a decrease in the ratio of variable expenses to sales.

C) an increase in the contribution margin ratio.

D) none of these.

D) none of these.

###
Which of the following strategies could be used to reduce the break-even point?

Fixed expenses Contribution margin

A) Increase Increase

B) Decrease Decrease

C) Decrease Increase

D) Increase Decrease

C) decrease and increase

###
Break-even analysis assumes that:

A) Total revenue is constant.

B) Unit variable expense is constant.

C) Unit fixed expense is constant.

D) Selling prices must fall in order to generate more revenue.

B) Unit variable expense is constant.

###
Target profit analysis is used to answer which of the following questions?

A) What sales volume is needed to cover all expenses?

B) What sales volume is needed to cover fixed expenses?

C) What sales volume is needed to earn a specific amount of net operating income?

D) What sales volume is needed to avoid a loss?

C) What sales volume is needed to earn a specific amount of net operating income?

###
The margin of safety can be calculated by:

A) Sales − (Fixed expenses/Contribution margin ratio).

B) Sales − (Fixed expenses/Variable expense per unit).

C) Sales − (Fixed expenses + Variable expenses).

D) Sales − Net operating income.

A) Sales − (Fixed expenses/Contribution margin ratio).

###
If the degree of operating leverage is 4, then a one percent change in quantity sold should result in a four percent change in:

A) unit contribution margin.

B) revenue.

C) variable expense.

D) net operating income.

D) net operating income.

###
Which of the following is the correct calculation for the degree of operating leverage?

A) net operating income divided by total expenses.

B) net operating income divided by total contribution margin.

C) total contribution margin divided by net operating income.

D) variable expense divided by total contribution margin.

C) total contribution margin divided by net operating income.

###
Which of the following is an assumption underlying standard CVP analysis?

A) In multiproduct companies, the sales mix is constant.

B) In manufacturing companies, inventories always change.

C) The price of a product or service is expected to change as volume changes.

D) Fixed expenses will change as volume increases.

A) In multiproduct companies, the sales mix is constant.

###
Hopi Corporation expects the following operating results for next year:

Sales $400,000

Margin of safety $100,000

Contribution margin ratio 75%

Degree of operating leverage 4

What is Hopi expecting total fixed expenses to be next year?

A) $75,000

B) $100,000

C) $200,000

D) $225,000

D) $225,000

###
Escareno Corporation has provided its contribution format income statement for June. The company produces and sells a single product.

Sales (8,400 units) $764,400

Variable expenses 445,200

Contribution margin 319,200

Fixed expenses 250,900

Net operating income $ 68,300

If the company sells 8,200 units, its total contribution margin should be closest to:

A) $301,000

B) $311,600

C) $319,200

D) $66,674

B) $311,600

###
Rovinsky Corporation, a company that produces and sells a single product, has provided its contribution format income statement for November.

Sales (5,700 units) $319,200

Variable expenses 188,100

Contribution margin 131,100

Fixed expenses 106,500

Net operating income $ 24,600

If the company sells 5,300 units, its net operating income should be closest to:

A) $24,600

B) $2,200

C) $22,874

D) $15,400

D) $15,400

###
Sorin Inc., a company that produces and sells a single product, has provided its contribution format income statement for January.

Sales (4,200 units) $155,400

Variable expenses 100,800

Contribution margin 54,600

Fixed expenses 42,400

Net operating income $ 12,200

If the company sells 4,600 units, its total contribution margin should be closest to:

A) $54,600

B) $59,800

C) $69,400

D) $13,362

B) $59,800

###
The margin of safety in the Flaherty Company is $24,000. If the company's sales are $120,000 and its variable expenses are $80,000, its fixed expenses must be:

A) $8,000

B) $32,000

C) $24,000

D) $16,000

B) $32,000

###
Dodero Company produces a single product which sells for $100 per unit. Fixed expenses total $12,000 per month, and variable expenses are $60 per unit. The company's sales average 500 units per month. Which of the following statements is correct?

A) The company's break-even point is $12,000 per month.

B) The fixed expenses remain constant at $24 per unit for any activity level within the relevant range.

C) The company's contribution margin ratio is 40%.

D) Responses A, B, and C are all correct.

C) The company's contribution margin ratio is 40%.

###
Holt Company's variable expenses are 70% of sales. At a $300,000 sales level, the degree of operating leverage is 10. If sales increase by $60,000, the degree of operating leverage will be:

A) 12

B) 10

C) 6

D) 4

D) 4

###
Gayne Corporation's contribution margin ratio is 12% and its fixed monthly expenses are $84,000. If the company's sales for a month are $738,000, what is the best estimate of the company's net operating income? Assume that the fixed monthly expenses do not change.

A) $565,440

B) $654,000

C) $88,560

D) $4,560

D) $4,560

###
Jilk Inc.'s contribution margin ratio is 58% and its fixed monthly expenses are $36,000. Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are $103,000?

A) $23,740

B) $59,740

C) $67,000

D) $7,260

A) $23,740

### Within the relevant range, a change in activity results in a change in total variable cost and the per unit fixed cost.

T

### The reluctance of managers to lay off employees when activity declines in the short-run leads to an increase in the ratio of variable to fixed costs.

F

### The reluctance of managers to lay off employees when activity declines in the short-run leads to an increase in the ratio of variable to fixed costs.

T

### Fixed costs remain constant in total, but vary inversely with changes in activity when expressed on a per unit basis.

T

### The following costs are all examples of committed fixed costs: depreciation on buildings, advertising, insurance, and management development and training.

F

### The time frame in which discretionary fixed costs are controllable is usually much shorter than the time frame for committed fixed costs.

T

### The high-low method is generally more accurate than the least-squares regression method in analyzing cost behavior.

F

###
A is a fixed cost; B is a variable cost. During the current year the level of activity has decreased but is still within the relevant range. We would expect that:

A) The cost per unit of A has remained unchanged.

B) The cost per unit of B has decreased.

C) The cost per unit of A has decreased.

D) The cost per unit of B has remained unchanged.

D) The cost per unit of B has remained unchanged.

###
Which costs will change with an increase in activity within the relevant range?

A) Unit fixed cost and total fixed cost

B) Unit variable cost and total variable cost

C) Unit fixed cost and total variable cost

D) Unit fixed cost and unit variable cost

C) Unit fixed cost and total variable cost

###
Salaries of accounts receivable clerks when one clerical worker is needed for every 750 accounts receivable is an example of a:

A) fixed cost

B) step-variable cost

C) mixed cost

D) curvilinear cost

B) step-variable cost

###
Limousine Conversion Company purchases ordinary Cadillacs, cuts them in half, and then adds a middle section to the vehicles to create stretch limousines. With respect to the number of cars converted, the cost of the Cadillacs purchased for conversion by Limousine Conversion Company would best be described as a:

A) fixed cost

B) mixed cost

C) step-variable cost

D) variable cost

D) variable cost

###
For an automobile manufacturer, the cost of a driver's side air bag purchased from a supplier and installed in every automobile would best be described as a:

A) fixed cost.

B) mixed cost.

C) step-variable cost.

D) variable cost.

D) variable cost.

###
In the standard cost formula Y = a + bX, what does the "Y" represent?

A) total cost

B) total fixed cost

C) total variable cost

D) variable cost per unit

A) total cost

###
In the standard cost formula Y = a + bX, what does the "a" represent?

A) total cost

B) total fixed cost

C) total variable cost

D) variable cost per unit

B) total fixed cost

###
Which of the following would usually be considered a discretionary fixed cost for a soft drink bottling company?

A) the cost of advertising its products

B) the cost of fire insurance on its factory building

C) depreciation on its manufacturing equipment

D) both a and b above

A) the cost of advertising its products

###
Utility costs at Service, Inc. are a mixture of fixed and variable components. Records indicate that utility costs are an average of $0.40 per hour at an activity level of 9,000 machine hours and $0.25 per hour at an activity level of 18,000 machine hours. Assuming that this activity is within the relevant range, what is the expected total utility cost if the company works 13,000 machine hours?

A) $4,225

B) $5,200

C) $4,000

D) $3,250

C) $4,000

###
Clerical costs in the billing department of Craig Company are a mixture of variable and fixed components. Records indicate that average unit processing costs are $0.50 per account processed at an activity level of 32,000 accounts. When only 22,000 accounts are processed, the total cost of processing is $12,500. Assuming that this activity is within the relevant range, at a budgeted level of 25,000 accounts:

A) processing costs are expected to total $8,750.

B) fixed processing costs are expected to be $10,400.

C) the variable processing costs are expected to be $0.35 per account processed.

D) processing costs are expected to total $14,975.

C) the variable processing costs are expected to be $0.35 per account processed.