Chapter 1

Question 1

The ability of fixed costs to magnify changes in sales to create disproportionate changes in profitability is called

Answer 1

Operating leverage

Question 2

When calculating a percentage change, the _________ measure is the starting point.

Answer 2

Base measure

Question 3

The possibility that sacrifices may exceed benefits is called

Answer 3

Risk

Question 4

As activity level decreases, total variable cost

Answer 4

will decrease

Question 5

A cost that does not change in total as activity level changes is a(n)

Answer 5

Fixed cost

Question 6

Subtracting fixed costs from contribution margin equals

Answer 6

Net income

Question 7

To magnify small changes in revenue into dramatic changes in profitability, managers apply

Answer 7

Operating leverage

Question 8

Given contribution margin of $500, net income of $100, and fixed costs of $400, the magnitude of operating leverage is

Answer 8

Contribution margin/net income
500/100 = 5

Question 9

Assume a company reported gross margin of $900 in Year 1 and $700 in Year 2. The percentage change in profitability from Year 1 to Year 2 i

Answer 9

(700-900) / 900 = 22.2

Question 10

A cost that has both a fixed and variable component is called

Answer 10

mixed costs

Question 11

A company pays their sales staff a salary of $6,000 a month plus a 5% commission on sales. If sales for the month equals $12,000, the total cost of the sales staff for the month is

Answer 11

6000 + (0.05 * 12000) = 6600

Question 12

A cost that changes in total as activity level changes is a(n)

Answer 12

Variable cost

Question 13

The contribution margin represents the amount available to

Answer 13

cover fixed costs and thereafter to provide a profit

Question 14

The levels of activity over which the definitions of fixed and variable costs are valid is commonly called the

Answer 14

relevant range

Question 15

Given contribution margin of $1,300, net income of $100, and fixed costs of $1,200, the magnitude of operating leverage is

Answer 15

1300/100 = 13

Question 16

The point at which profit equals zero is called the

Answer 16

Break-even point

Question 17

A cost that has both a fixed and variable component is called a

Answer 17

Mixed

Question 18

The sales price of a product is $20.00 per unit; the variable cost is $7.50 per unit; and fixed costs total $10,000. How many units must be sold to break even?

Answer 18

20N - 7.5N - 10000 = 0
12.5N - 10000 = 0
12.5N = 10000
N = 10000/12.5 = 800

Question 19

A company has a maintenance contract with a fixed fee of $1,200 per month plus $75 per hour for each maintenance hour used. In a month where 20 maintenance hours are used, the total

Answer 19

1200 + (75 * 20) = 2700

Question 20

If a product has a unit contribution margin of $12, a sales price of $20 and total fixed costs of $1,000, its variable cost per unit must be

Answer 20

sales price - contribution margin = 20 - 12 = 9

Question 21

As activity level increases, variable cost per unit

Answer 21

Does not change

Question 22

If the sales price of a product is $10 per unit; the variable cost is $4 per unit; and fixed costs total $1,200, how many units must be sold to earn a profit of $1,800?

Answer 22

10N - 4N - 1200 = 1800
6N = 3000
N = 3000/6
N = 500

Question 23

If the contribution margin per unit is $100 and fixed costs total $1,000, how many units must be sold to earn a profit of $10,000?

Answer 23

(1000 + 10000)/100 = 110

Question 24

At the breakeven point, profit equals

Answer 24

Zero

Question 25

The amount at which actual sales can fall short of expectations before a company begins to incur losses is called the

Answer 25

Margin of Safety

Question 26

The sales price of a product is $100 per unit; the variable cost is $20 per unit; and fixed costs total $800. How many units must be sold to break even?

Answer 26

100N - 20N - 800 = 0
80N = 800
N = 800/80

Question 27

If a company has budgeted sales of $15,000 and break-even sales of $9,000, the margin of safety is

Answer 27

(15000 - 9000) / 15000 = 0.4 = 40%

Question 28

A item with a sales price of $15 per unit and variable cost of $11 per unit has a contribution margin of

Answer 28

SALES PRICE PER UNIT - VARIABLE COST PER UNIT = 15 - 11

Question 29

If the sales price of a product is $10 per unit; the variable cost is $5 per unit; and fixed costs total $1,000, the company will earn a profit of $5 if

Answer 29

10N - 5N - 1000 = 5
5N = 1005
N = 1005/5
N = 201

Question 30

If the contribution margin per unit is $200 and fixed costs total $1,000, how many units must be sold to earn a profit of $1,000?

Answer 30

200n - 1000 = 1000
N = 2000/200
N = 10