chapter 6 assignment questions Flashcards
The margin of safety is the difference between sales at break even and sales at a determined activity level
True
False
True
Operating leverage refers to the extent to which a company’s net income reacts to a given change in fixed costs
True
False
False
When looking at a cost-volume-profit (CVP) graph for a profitable company, the total revenue line will be flatter than the total expense line
True
False
False
If variable expenses are 70% of sales, a $1,500 increase in sales will result in an increase in the break-even point of $5,000
True
False
False
A company’s margin of safety is the number of units that must be sold in order to maintain operations
True
False
False
A company’s operating leverage will increase if its fixed costs increase
True
False
True
Contribution margin is the amount of profit remaining after deducting cost of goods sold
True
False
False
Using the assumptions of CVP analysis, if a company thought its sales may increase by 50% in the upcoming year over last year, the variable costs in total will change by a similar percentage
True
False
True
For a company with multiple products, the break-even point in dollars is variable costs divided by the weighted-average contribution margin ratio
True
False
False
Which of the following is the correct formula for the contribution margin per unit?
a) sales – total variable cost
b) unit selling price ÷ unit variable cost
c) (unit selling price – unit variable cost) ÷ unit selling price
d) unit selling price – unit variable cost
d) unit selling price – unit variable cost
Which of the following is the correct formula for the contribution margin ratio?
a) sales – total variable cost
b) (unit selling price – unit variable cost) ÷ unit selling price
c) unit selling price – unit variable cost
d) (unit selling price – unit variable cost) ÷ unit variable cost
b) (unit selling price – unit variable cost) ÷ unit selling price
Which one of the following calculates the break-even point in units?
a) Divide total fixed costs by the contribution margin per unit
b) Divide fixed cost per unit by the contribution margin per unit
c) Divide total contribution margin by the number of units sold
d) Divide total fixed costs by the contribution margin ratio
a) Divide total fixed costs by the contribution margin per unit
What does the margin of safety measure?
a) How far prices can be changed before the CVP analysis is no longer valid
b) How much sales can drop before the firm has an operating loss
c) How far fixed costs can drop before the firm has an operating loss
d) How far variable costs can rise before the firm has an operating loss.
b) How much sales can drop before the firm has an operating loss
Needles, Inc. was evaluating its margin of safety. Which one of the following is true?
a) The break-even point is not relevant.
b) The higher the ratio, the greater the margin of safety.
c) The higher the dollar amount, the lower the margin of safety.
d) The higher the ratio, the lower the fixed costs.
b) The higher the ratio, the greater the margin of safety.
The margin of safety ratio
a) is calculated as actual sales divided by break-even sales.
b) indicates what percent decline in sales could be sustained before the company would operate at a loss.
c) measures the ratio of fixed costs to variable costs.
d) is used to determine the break-even point.
b) indicates what percent decline in sales could be sustained before the company would operate at a loss.
