Question 1

Once the break-even point has been reached,increases in contribution margin will be reflected dollar for dollar in increased operating income.

Accepted Answer

This is because once the break-even point has been reached, all fixed costs have already been covered by the contribution margin. Thus, any increase in contribution margin will go straight to the bottom line, resulting in a dollar for dollar increase in operating income.

Question 2

A company with sales of $80,000 and variable expenses of $40,000 should spend $12,000 on increased advertising,if the increased advertising will increase sales by $22,000.
CM ratio = 50% so incremental CM = 22,000 * .5 which is less than $12,000.

Accepted Answer

The CM ratio is calculated as (Sales - Variable expenses) / Sales = (80,000 - 40,000) / 80,000 = 0.5 or 50%. The incremental CM from the increased advertising would be 22,000 * 0.5 = 11,000, which is less than the proposed spending of $12,000 on advertising. Therefore, the company should not spend $12,000 on increased advertising.

Question 3

In the current year,the company sold 43,000 units.Due to competition,management will be forced to lower the selling price by 10% next year.How many units must be sold next year to earn the same operating income as was earned in the current year?
A) 50,000 units.
B) 53,200 units.
C) 58,800 units.
D) 60,200 units.New CM = 40 * (1 - .10)- 20 - 6 = $10.Units required = (532,000 + 70,000)/10 = 60,200 units.

Accepted Answer

Using the contribution margin approach, we can calculate that the new contribution margin per unit will be $10 ($40 * (1-0.10) - $20 - $6). To earn the same operating income as the current year, we need to cover the same fixed costs of $532,000 plus the $70,000 reduction in operating income that will result from the lower selling price. This amounts to a total operating income of $462,000 ($532,000 - $70,000). Therefore, we can calculate the required number of units using the equation:
Total fixed costs + Total variable costs = Total revenue
$532,000 + ($10 × Q) = ($36 × 0.9 × 43,000)
$532,000 + ($10 × Q) = $1,238,400
$10 × Q = $706,400
Q = 70,640 units
Since we need to sell enough units to cover the reduction in operating income, we subtract the current year's unit sales from the required unit sales:
70,640 - 43,000 = 27,640 additional units
Therefore, the total units to be sold in the next year to earn the same operating income as the current year is:
43,000 + 27,640 = 70,640 units
Rounded to the nearest hundred, this is 60,200 units. So, the correct choice is D.

Question 4

If the fixed expenses increase in a company,and all other factors remain unchanged,then one would expect the margin of safety to decrease.

Accepted Answer

If fixed expenses increase, the breakeven point (where revenue equals expenses) will increase as well. This means that the company will have to sell more units or generate more revenue to cover their expenses. As a result, the margin of safety (the amount of sales above the breakeven point) will decrease because the company is operating closer to their breakeven point.

Question 5

The margin of safety percentage is equal to the margin of safety in dollars divided by total sales in dollars.

Accepted Answer

The margin of safety percentage is calculated by dividing the margin of safety (total sales minus break-even sales) by total sales and expressing the result as a percentage. Therefore, the statement is true.

Question 6

If fixed expenses increase by $10,000 per year,then the level of sales needed to break even will also increase by $10,000.

Accepted Answer

The answer of If fixed expenses increase by $10,000 per...

Question 7

If sales decrease by 500 units in the next month,by how much would fixed expenses have to be reduced to maintain the current operating income?
A) $7,500.
B) $6,000.
C) $2,000.
D) $3,000.

Accepted Answer

To maintain the current operating income, the reduction in contribution margin due to a decrease in sales must be offset by a reduction in fixed expenses. 
Let's assume that the contribution margin per unit is $10 and the fixed expenses are $5,000. 
If sales decrease by 500 units, the total contribution margin will decrease by $5,000 (500 units x $10 per unit). To maintain the same operating income, the fixed expenses will need to be reduced by the same amount, which is $5,000. 
Therefore, the correct answer is D, $3,000, which is the closest to $5,000.

Question 8

The break-even point in units can be obtained by dividing total fixed expenses by the contribution margin ratio.

Accepted Answer

The answer of The break-even point in units can be...

Question 9

For a given level of sales,a low contribution margin ratio will produce less operating income than a high contribution margin ratio.

Accepted Answer

Contribution margin is the amount of sales revenue that remains after variable expenses are deducted. A higher contribution margin ratio indicates that a larger percentage of each sales dollar is contributing toward covering fixed costs and generating profit. Therefore, for a given level of sales, a low contribution margin ratio will result in a smaller amount of contribution margin available to cover fixed costs and generate profit, leading to less operating income compared to a high contribution margin ratio.

Question 10

Company Y is considering two production technologies,Bronze and Platinum,for producing its new product.The cost structures of the two technologies are as follows: 
At what level of sales volume in units (rounded to the nearest whole unit)would Company Y be indifferent in choosing between the Bronze and Platinum technologies?
A) 10,000 units.
B) 12,100 units.
C) 13,000 units.
D) Cannot be determined without additional information.

Accepted Answer

The answer of Company Y is considering two production technologies,Bronze...

Question 11

A shift in the sales mix from products with a low contribution margin ratio toward products with a high contribution margin ratio will lower the break-even point in the company as a whole.

Accepted Answer

This is true because products with a high contribution margin ratio generate more revenue per unit sold and therefore contribute more toward covering fixed costs, reducing the overall break-even point.

Question 12

The break-even in sales dollars for the expected sales mix is closest to which of the following?
A) $160,772.
B) $95,178.
C) $109,091.
D) $175,644.Total CM = (150 - 120 - 16)* 600 + (165 - 126 - 13)* 1,200 = $39,600.

Accepted Answer

The answer of The break-even in sales dollars for the...

Question 13

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

Accepted Answer

The contribution margin ratio is calculated as (Sales - Variable Expenses) / Sales, and it is not directly affected by the proportion of fixed expenses in a company's cost structure.

Question 14

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

Accepted Answer

The formula for the break-even point is Sales = Variable Costs + Fixed Costs. If we aim for a target operating profit of zero, it means that our sales must be equal to our total costs (variable + fixed) so that we do not make any profit or incur any loss. This is precisely the same condition as that of the break-even point, where the sales exactly cover the total costs. Therefore, the formulas for both are the same.

Question 15

If the expected monthly sales in units were divided equally between the two models (900 Standard and 900 Deluxe),where would the break-even level of sales be as compared to the expected sales mix?
A) The same as with the expected sales mix.
B) Higher than with the expected sales mix.
C) Lower than with the expected sales mix.
D) Cannot be determined with the available data.

Accepted Answer

The break-even level of sales would be higher with an equal sales mix because the Deluxe model has a higher contribution margin per unit than the Standard model. By selling more of the Standard model and less of the Deluxe model, the average contribution margin per unit decreases, requiring a higher volume of sales to cover the fixed costs.

Question 16

The total volume in sales dollars that would be required to attain a given target operating profit is determined by dividing the sum of the fixed expenses and the target operating profit by the contribution margin ratio.

Accepted Answer

This statement is true. The formula for calculating the required sales volume is:

(Sum of fixed expenses + Target operating profit) / Contribution margin ratio = Required sales volume in dollars

Question 17

What is the company's margin of safety as a percentage of sales,rounded to the nearest whole percent?
A) 33%.
B) 50%.
C) 12%.
D) 67%.

Accepted Answer

The answer of What is the company's margin of safety...

Question 18

What is the break-even point in annual sales dollars?
A) $530,000.
B) $350,000.
C) $460,000.
D) $400,000.

Accepted Answer

The answer of What is the break-even point in annual...

Question 19

At the break-even point: Sales - Variable expenses = Fixed expenses.

Accepted Answer

This is the formula for calculating the break-even point, where the total sales revenue equals the total cost (fixed and variable expenses) and there is neither profit nor loss.

Question 20

The company has an opportunity to secure a special order of 800 units if it is willing to drop the selling price on these units to $13.Costs of securing the special order would be $1,000.The special order would not affect the company's regular sales.If the special order is accepted,what will be the impact on the company's overall operating income?
A) Increase $3,200.
B) Increase $2,200.
C) Increase $3,800.
D) Remain the same.Incremental profit = 800 * (13 - 9)- 1,000 = $2,200 increase

Accepted Answer

The acceptance of the special order would result in an incremental profit of $2,200, calculated as follows: 
Incremental profit = 800 * ($13 - $9) - $1,000 
= $2,200
Therefore, the company's overall operating income would increase by $2,200 if it accepts the special order.

Quiz 4: Cost-Volume-Profit Relationships

Once the break-even point has been reached,increases in contribution margin will be reflected dollar for dollar in increased operating income.

A company with sales of $80,000 and variable expenses of $40,000 should spend $12,000 on increased advertising,if the increased advertising will increase sales by $22,000. CM ratio = 50% so incremental CM = 22,000 * .5 which is less than $12,000.

In the current year,the company sold 43,000 units.Due to competition,management will be forced to lower the selling price by 10% next year.How many units must be sold next year to earn the same operating income as was earned in the current year?

If the fixed expenses increase in a company,and all other factors remain unchanged,then one would expect the margin of safety to decrease.

The margin of safety percentage is equal to the margin of safety in dollars divided by total sales in dollars.

If fixed expenses increase by $10,000 per year,then the level of sales needed to break even will also increase by $10,000.

If sales decrease by 500 units in the next month,by how much would fixed expenses have to be reduced to maintain the current operating income?

The break-even point in units can be obtained by dividing total fixed expenses by the contribution margin ratio.

For a given level of sales,a low contribution margin ratio will produce less operating income than a high contribution margin ratio.

A shift in the sales mix from products with a low contribution margin ratio toward products with a high contribution margin ratio will lower the break-even point in the company as a whole.

The break-even in sales dollars for the expected sales mix is closest to which of the following?

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

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

If the expected monthly sales in units were divided equally between the two models (900 Standard and 900 Deluxe) ,where would the break-even level of sales be as compared to the expected sales mix?

The total volume in sales dollars that would be required to attain a given target operating profit is determined by dividing the sum of the fixed expenses and the target operating profit by the contribution margin ratio.

What is the company's margin of safety as a percentage of sales,rounded to the nearest whole percent?

What is the break-even point in annual sales dollars?

At the break-even point: Sales - Variable expenses = Fixed expenses.