Chapter-6 Cost-Volume-Profit Relationships True/False
1. One way to compute the total contribution margin is to add total fixed expenses to net operating income.
2. On a CVP graph for a profitable company, the total revenue line will be steeper than the total cost line.
3. 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.
4. If the variable expense per unit increases, and all other factors remain constant, the contribution margin ratio will increase.
5. 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.
6. 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.
7. 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.
8. An increase in total fixed expenses will not affect the break-even point so long as the contribution margin ratio remains unchanged.
9. All other things the same, a reduction in the variable expense per unit will cause the break-even point to rise.
10. The unit sales volume necessary to reach a target profit is determined by dividing the target profit by the contribution margin per unit.
11. 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.
12. The margin of safety in dollars equals the excess of budgeted (or actual) sales over the break-even volume of sales.
13. 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.
14. 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]
15. 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.
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1. One way to compute the total contribution margin is to add total fixed expenses to net operating income.
2. On a CVP graph for a profitable company, the total revenue line will be steeper than the total cost line.
3. 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.
4. If the variable expense per unit increases, and all other factors remain constant, the contribution margin ratio will increase.
5. 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.
6. 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.
7. 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.
8. An increase in total fixed expenses will not affect the break-even point so long as the contribution margin ratio remains unchanged.
9. All other things the same, a reduction in the variable expense per unit will cause the break-even point to rise.
10. The unit sales volume necessary to reach a target profit is determined by dividing the target profit by the contribution margin per unit.
11. 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.
12. The margin of safety in dollars equals the excess of budgeted (or actual) sales over the break-even volume of sales.
13. 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.
14. 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]
15. 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.
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