Question 1

The impact on net operating income of a given dollar change in sales can be computed by multiplying the contribution margin by the dollar change in sales.

Accepted Answer

False

Question 2

At the break-even point, the total contribution margin and fixed expenses are equal.

Accepted Answer

This is the definition of the break-even point, where the company is neither making a profit nor incurring a loss. Therefore, total contribution margin (revenue minus variable costs) must equal fixed expenses in order to break even.

Question 3

If two companies produce the same product and have the same total sales and same total expenses, operating leverage will be higher in the company with a higher proportion of fixed expenses in its cost structure.

Accepted Answer

Operating leverage is the degree to which a company uses fixed costs in its cost structure. When two companies have the same total sales and total expenses, the one with a higher proportion of fixed expenses will have a higher operating leverage because a larger portion of their costs are fixed, meaning they do not change with changes in production or sales. This results in a greater impact on profits when sales revenue increases or decreases.

Question 4

All other things the same, an increase in total fixed expenses will increase the break-even point.

Accepted Answer

The break-even point is the level of sales at which total revenue equals total cost. Total cost includes both fixed and variable expenses. When total fixed expenses increase, the total cost of producing a product or providing a service also increases. This means that the business will need to sell more units or services to cover the total cost and reach the break-even point. Thus, an increase in total fixed expenses will increase the break-even point.

Question 5

Reynold Enterprises sells a single product for $25. The variable expense per unit is $15 and the fixed expense per unit is $5 at the current level of sales. The company's net operating income will increase by $10 if one more unit is sold.

Accepted Answer

The contribution margin per unit is the difference between the selling price and variable expenses per unit which is $10 ($25 - $15).

The contribution margin ratio is calculated by dividing the contribution margin by the selling price.

Contribution Margin Ratio = $10/$25 = 0.4 or 40%

Total Fixed Costs = Fixed expenses per unit x Number of units = $5 x Current level of sales

To calculate the breakeven point, we use the formula:

Breakeven Point in Units = Total Fixed Costs / Contribution Margin per Unit = $5x/current level of sales = 0.5x

Breakeven Point in Dollars = Selling Price x Breakeven Point in Units = $25 x 0.5x = $12.5x

To achieve a net operating income of $10 more, we need to sell one more unit.

Therefore, the contribution margin from selling one more unit is $10.

The breakeven point stays the same, but the company’s net operating income increases by $10 for each additional unit sold beyond the breakeven point.

Hence, the statement is true.

Question 6

Incremental analysis is generally the most complicated and least direct approach to decision making.

Accepted Answer

Incremental analysis involves analyzing the costs and benefits of each alternative option to determine which one is the most profitable. This approach can be complicated because it requires a detailed calculation of all the incremental costs and benefits associated with each option, and the results may not always be clear or straightforward. Therefore, incremental analysis is often considered the most complicated and least direct approach to decision making.

Question 7

One assumption in CVP analysis is that the number of units produced and sold does not change.

Accepted Answer

One assumption of CVP analysis is that the number of units produced and sold is fixed. However, in reality, the number of units produced and sold may fluctuate due to changes in market demand, competition, or other external factors.

Question 8

For a capital intensive, automated company the break-even point will tend to be higher and the margin of safety will be lower than for a less capital intensive company with the same sales.

Accepted Answer

A capital-intensive, automated company requires a significant investment in machinery and technology to operate, which increases fixed costs. As a result, the break-even point, or the level of sales at which the company earns no profit or loss, will be higher because the fixed costs must be covered before any profit can be made. A higher break-even point translates to a lower margin of safety, which is the cushion between the actual sales and the break-even point. In contrast, a less capital-intensive company with the same sales may have lower fixed costs, resulting in a lower break-even point and higher margin of safety.

Question 9

On a cost-volume-profit graph, the revenue line will be shown below the total expense line for any activity level above the break-even point.

Accepted Answer

The answer of On a cost-volume-profit graph, the revenue line...

Question 10

All other things the same, a reduction in the variable expense per unit will decrease the break-even point.

Accepted Answer

If variable expenses per unit decrease, then the contribution margin per unit will increase, which leads to a decrease in the break-even point. This occurs because when variable expenses are reduced, less revenue is required to cover total costs and break even.

Question 11

All other things the same, an increase in variable expense per unit will reduce the break-even point.

Accepted Answer

An increase in variable expense per unit will increase the contribution margin per unit (sales price - variable expense per unit), which in turn will reduce the break-even point. Therefore, the statement is false.

Question 12

The degree of operating leverage in a company is largest at the break-even point and decreases as sales rise.

Accepted Answer

The degree of operating leverage (DOL) is highest at the break-even point, where it equals 1, and it decreases as sales rise above the break-even point. This is because fixed costs become a smaller proportion of total costs as sales increase, so a change in sales results in a smaller proportional change in profits.

Question 13

The unit sales volume necessary to reach a target profit is determined by dividing the sum of the fixed expenses and the target profit by the contribution margin per unit.

Accepted Answer

This statement is true. The formula for calculating the unit sales volume required to reach a target profit is:
(Unit sales volume) = (Fixed expenses + Target profit) / Contribution margin per unit.

Question 14

As total sales increase beyond the break-even point, the degree of operating leverage will decrease.

Accepted Answer

As sales increase beyond the break-even point, fixed costs will remain constant while variable costs increase. This leads to a decrease in the degree of operating leverage, which is the measure of how sensitive a company's operating income is to changes in sales.

Question 15

If sales volume decreases, and all other factors remain unchanged, the contribution margin ratio will decrease.

Accepted Answer

The answer of If sales volume decreases, and all other...

Question 16

One way to compute the total contribution margin is to deduct total fixed expenses from net operating income.

Accepted Answer

To compute the total contribution margin, we need to deduct total variable expenses from total sales revenue. The contribution margin can then be used to cover fixed expenses and generate net operating income.

Question 17

The margin of safety in dollars equals the excess of actual sales over budgeted sales.

Accepted Answer

The margin of safety in dollars equals the excess of budgeted sales over actual sales.

Question 18

All other things the same, in periods of increasing sales, net operating income will tend to increase more rapidly in a company with high fixed costs and low variable costs than in a company with high variable costs and low fixed costs.

Accepted Answer

When sales increase, companies with high fixed costs and low variable costs will have a higher contribution margin (sales minus variable costs) that will result in a higher net operating income compared to companies with high variable costs and low fixed costs, which will have a lower contribution margin. This is because fixed costs are already incurred regardless of sales volume, so any increase in sales will contribute more towards covering those fixed costs and generating profit.

Question 19

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

Accepted Answer

This is because the higher proportion of fixed expenses means that the variable expenses (which are deducted from sales to get the contribution margin) are lower, resulting in a higher contribution margin ratio.

Question 20

All other things the same, if the fixed expenses increase in a company then one would expect the margin of safety to increase.

Accepted Answer

The answer of All other things the same, if the...

Quiz 6: Variable Costing and Segment Reporting: Tools for Management