Question 1

To determine the number of units needed to earn a target profit,divide the target contribution margin by the contribution margin per unit.Divide total fixed costs plus profit by the contribution margin per unit.

Accepted Answer

The correct method is to divide the sum of total fixed costs and target profit by the contribution margin per unit to determine the number of units needed to earn a target profit.

Question 2

Managers can use cost-volume-profit analysis to evaluate changes in price.CVP analysis is useful in evaluating changes in price and cost structure.

Accepted Answer

Cost-volume-profit analysis can help managers understand the impact of changes in price on their business and evaluate the cost structure to maximize profits.

Question 3

Target units equals fixed costs plus target profit divided by the unit contribution margin.This is the formula for target units.

Accepted Answer

This is the correct formula for determining the target units that need to be sold to achieve the desired target profit while covering fixed costs.

Question 4

An important assumption in multiproduct cost-volume-profit analysis is that the sales mix remains constant.The weighted average contribution margin approach assumes a constant sales mix.

Accepted Answer

The statement is true. Multiproduct cost-volume-profit analysis assumes a constant sales mix, and the weighted average contribution margin approach also assumes a constant sales mix.

Question 5

The break-even point is the point at which profit equals zero.The break-even point is where the company breaks even,or has zero profit.

Accepted Answer

The break-even point is the point where the company generates enough revenue to cover its total costs, resulting in zero profit. Therefore, the statement is true.

Question 6

In multiproduct cost-volume-profit analysis,a break-even point must be calculated separately for each product.A combined break-even point can be calculated using a weighted average contribution margin.

Accepted Answer

The answer of In multiproduct cost-volume-profit analysis,a break-even point must...

Question 7

The target sales level equals fixed costs plus variable costs divided by the contribution margin ratio.Target sales level equals fixed costs plus target profit divided by the contribution margin ratio.

Accepted Answer

The target sales level is calculated by dividing the sum of fixed costs and target profit by the contribution margin ratio, not by adding variable costs.

Question 8

The degree of operating leverage can be multiplied by a change in sales to determine change in profit.This is the primary use of degree of operating leverage.

Accepted Answer

The degree of operating leverage (DOL) helps a company to determine how sensitive its profit is to changes in sales. By multiplying DOL with a change in sales, a company can calculate the expected change in profit. Therefore, the primary use of DOL is to determine the impact of sales changes on profit.

Question 9

Contribution margin is equal to fixed costs at the break-even point.At break-even point,profit,or contribution margin minus fixed costs,is zero,so contribution margin must equal fixed costs.

Accepted Answer

This statement is true. The break-even point is reached when total revenue equals total costs, and at this point, the contribution margin covers exactly the fixed costs, resulting in zero profit. Therefore, contribution margin is equal to fixed costs at the break-even point.

Question 10

Break-even units can be found by dividing fixed costs by unit contribution margin.At break-even point,contribution margin just covers fixed costs,so dividing fixed costs by unit contribution margin yields the number of units needed.

Accepted Answer

This statement accurately describes the formula for calculating break-even units.

Question 11

Degree of operating leverage is calculated by dividing sales by profit.Degree of operating leverage is calculated by dividing contribution margin by profit.

Accepted Answer

Degree of operating leverage is calculated by dividing contribution margin by profit, not by sales.

Question 12

Managers can use cost-volume-profit analysis to evaluate changes in cost structure.CVP analysis is useful in evaluating changes in price and cost structure.

Accepted Answer

Cost-volume-profit analysis helps managers understand how changes in cost structure, including changes in pricing strategy, can impact their overall profitability. By analyzing the relationship between fixed costs, variable costs, unit prices, and unit sales volume, managers can identify ways to improve profitability and make better strategic decisions.

Question 13

Cost-volume-profit analysis assumes that all costs can be accurately described as either fixed or variable.Cost-volume-profit analysis assumes that costs can be classified or broken down as fixed or variable.

Accepted Answer

Cost-volume-profit analysis is based on the assumption that costs can be classified into fixed and variable components. Fixed costs remain constant regardless of changes in production levels, while variable costs vary in proportion to changes in volume of production. By analyzing the relationship between revenues, costs, and production volume, cost-volume-profit analysis can help businesses make informed decisions about pricing, product mix, and production levels.

Question 14

Cost-volume-profit analysis can only be performed for companies that sell only one product.Firms that sell more than one product can use multiproduct cost-volume-profit analysis.

Accepted Answer

This statement is false. Multiproduct cost-volume-profit analysis is a technique that can be used by firms that sell more than one product to determine the profitability of individual products and the overall profitability of the business. It involves analyzing the sales mix and contribution margin of each product to determine the breakeven point and the level of sales required to achieve a desired profit.

Question 15

On a CVP graph,the break-even point is the point at which the contribution margin line crosses the total cost line.The break-even point is the point at which the total revenue line crosses the total cost line.

Accepted Answer

The break-even point on a CVP graph is where the total revenue line crosses the total cost line, not the contribution margin line.

Question 16

The margin of safety is a positive number at the break-even point.The margin of safety will be zero at the break-even point.

Accepted Answer

The margin of safety is the difference between actual sales and the break-even point. Therefore, at the break-even point, the margin of safety is zero, not a positive number.

Question 17

A firm with a higher degree of operating leverage would be considered less risky than a comparable firm with a lower degree of operating leverage.A company with a higher degree of operating leverage will experience larger swings in profit as a result of changes in sales revenue,and so will be considered more risky.

Accepted Answer

A company with a higher degree of operating leverage will experience larger swings in profit as a result of changes in sales revenue, making it more vulnerable to economic downturns and less stable in terms of financial performance, which increases risk.

Question 18

Cost-volume-profit analysis assumes that total costs behave in a curvilinear fashion.Cost-volume-profit analysis assumes that total costs behave in a linear fashion.

Accepted Answer

Cost-volume-profit analysis assumes that total costs behave in a linear fashion, not a curvilinear fashion. This means that the relationship between costs and the level of sales or production is constant and predictable, allowing businesses to make informed decisions about pricing, production levels, and overall profitability. However, it is important to note that this assumption may not hold true in all cases, particularly when there are changes in the business environment or other factors that can impact costs.

Question 19

The margin of safety is the point where zero profit is earned.The margin of safety is how much sales can drop before zero profit is earned.

Accepted Answer

The margin of safety is the difference between actual sales and break-even sales, indicating how much sales can drop before reaching the break-even point, not zero profit.

Question 20

The margin of safety is the difference between actual sales and budgeted sales.The margin of safety is the difference between actual or budgeted sales and break-even sales.

Accepted Answer

The margin of safety is the difference between actual or budgeted sales and break-even sales, not just between actual and budgeted sales.

Quiz 6: Cost-Volume-Profit Analysis