Chapter 5 Quiz

Question 1

The break-even point in units can be obtained by dividing total fixed expenses by the unit contribution margin. True or False?

Answer 1

True.

Question 2

The degree of operating leverage is computed by dividing sales by the contribution margin. True or False?

Answer 2

False

Question 3

Fawn Company’s margin of safety is $90,000. If the company’s sales drop by $80,000, it will still have a positive net operating income. True or False?

Answer 3

True.

Question 4

The total volume in sales dollars that would be required to attain a given target profit is determined by dividing the target profit by the contribution margin ratio. True or False?

Answer 4

False.

Question 5

The margin of safety percentage is equal to the margin of safety in dollars divided by total contribution margin. True or False?

Answer 5

False.

Question 6

The margin of safety is the amount by which sales can decrease before losses are incurred by the company. True or False?

Answer 6

True.

Question 7

Break-even analysis assumes that:

A) Total revenue is constant.
B) Selling prices must fall in order to generate more revenue.
C) Unit fixed expense is constant.
D) Unit variable expense is constant.

Answer 7

Unit variable expense is constant.

Question 8

If the contribution margin is not sufficient to cover fixed expenses:

A) Total profit equals total expenses.
B) Variable expenses equal contribution margin.
C) Contribution margin is negative.
A) A loss occurs.

Answer 8

A loss occurs.

Question 9

To obtain the dollar sales volume necessary to attain a given target profit, which of the following formulas should be used?

A) (Fixed expenses + Target net profit)/Contribution margin ratio
B) Target net profit/Contribution margin ratio
C) (Fixed expenses + Target net profit)/Total contribution margin
D) Fixed expenses/Contribution margin per unit

Answer 9

(Fixed expenses + Target net profit)/Contribution margin ratio

Question 10

If the degree of operating leverage is 4, then a one percent change in quantity sold should result in a four percent change in:

A) Variable expense.
B) Net operating income.
C) Revenue.
D) Unit contribution margin.

Answer 10

Net operating income.

Question 11

The contribution margin ratio equals:

A) Contribution margin ÷ variable expenses.
B) Sales ÷ contribution margin.
C) Contribution margin ÷ sales.
D) Sales ÷ variable expenses.

Answer 11

Contribution margin ÷ sales.

Question 12

Which of the following is not an underlying assumption of cost-volume-profit analysis?

A) Variable cost per unit is constant within the relevant range.
B) Selling price is constant.
C) In multiproduct companies, the mix of products sold remains constant.
D) Total fixed cost varies inversely with changes in the level of activity.

Answer 12

Total fixed cost varies inversely with changes in the level of activity.

Question 13

Which of the following is not an underlying assumption of cost-volume-profit analysis?

A) Variable cost per unit is constant within the relevant range.
B) Selling price is constant.
C) The average fixed cost per unit increases as the level of activity increases.
D) In multiproduct companies, the mix of products sold remains constant.

Answer 13

The average fixed cost per unit increases as the level of activity increases.

Question 14

Which of the following statements is true?

A) Contribution margin − fixed expenses = net operating income
B) Sales + variable expenses = contribution margin
C) Contribution margin + net operating income = sales
D) Sales − contribution margin = net operating income

Answer 14

Contribution margin − fixed expenses = net operating income

Question 15

Which of the following statements is false?

A) Sales mix refers to the relative proportions in which a company’s products are sold.
B) The break-even point is the level of sales at which the total contribution margin equals the total fixed costs.
C) Margin of safety is the excess of break-even dollar sales over the budgeted or actual dollar sales.
D) Operating leverage is a measure of how sensitive net operating income is to a given percentage change in dollar sales.

Answer 15

Margin of safety is the excess of break-even dollar sales over the budgeted or actual dollar sales.

Question 16

Which of the following statements is true?

A) Sales − contribution margin = net operating income
B) Contribution margin + net operating income = sales
C) Contribution margin + fixed expenses = net operating income
D) Sales − variable expenses = contribution margin

Answer 16

Sales − variable expenses = contribution margin

Question 17

Which of the following statements is false?

A) The break-even point is the level of sales at which the total sales dollar amount equals the total fixed costs.
B) Margin of safety is the excess of budgeted or actual dollar sales over the break-even dollar sales.
C) Sales mix refers to the relative proportions in which a company’s products are sold.
D) Operating leverage is a measure of how sensitive net operating income is to a given percentage change in dollar sales.

Answer 17

The break-even point is the level of sales at which the total sales dollar amount equals the total fixed costs.

Question 18

Which of the following is not an underlying assumption of cost-volume-profit analysis?

A) Variable cost per unit varies inversely with changes in the level of activity.
B) Total fixed costs are constant within the relevant range.
C) Selling price is constant.
D) In multiproduct companies, the mix of products sold remains constant.

Answer 18

Variable cost per unit varies inversely with changes in the level of activity.

Question 19

Which of the following is not an underlying assumption of cost-volume-profit analysis?

A) Selling price is constant.
B) Net operating income is constant.
C) Total fixed costs are constant within the relevant range.
D) Variable costs per unit are constant.

Answer 19

Net operating income is constant.

Question 20

Which of the following statements is false?

A) The break-even point is the level of sales at which the total contribution margin equals the total fixed costs.
B) Sales mix refers to the relative selling prices of a company’s various products.
C) Operating leverage is a measure of how sensitive net operating income is to a given percentage change in dollar sales.
D) Margin of safety is the excess of budgeted or actual dollar sales over the break-even dollar sales.

Answer 20

Sales mix refers to the relative selling prices of a company’s various products.

Question 21

The variable expense ratio equals:

A) Variable expenses ÷ contribution margin.
B) Variable expenses ÷ sales.
C) Sales ÷ contribution margin.
D) Sales ÷ variable expenses.

Answer 21

Variable expenses ÷ sales.

Question 22

Which of the following statements is false?

A) Margin of safety is the excess of budgeted or actual dollar sales over the break-even dollar sales.
B) Sales mix refers to the relative proportions in which a company’s products are sold.
C) The break-even point is the level of sales at which the total contribution margin equals the total fixed costs.
D) Operating leverage is a measure of how sensitive fixed costs are to a given percentage change in dollar sales.

Answer 22

Operating leverage is a measure of how sensitive fixed costs are to a given percentage change in dollar sales.