THEORY

Question 1

Which of the following is correct? The break-even point occurs on the CVP graph where:

Answer 1

total contribution margin equals total fixed expenses.

Question 2

If a company decrease its total fixed expenses while increasing the variable expense per unit, the total expense line relative to its previous position on a cost-volume-profit graph will:

Answer 2

shift downward and have a steeper slope.

Question 3

East Company manufactures and sells a single product with a positive contribution margin. If the selling price and the variable expense per unit both increase 5% and fixed expenses do not change, what is the effect on the contribution margin per unit and the contribution margin ratio?

Answer 3

Contribution margin per unit: increase
Contribution margin ratio: no change

Question 4

Mossfeet Shoe Company is a single product firm. Mossfeet is predicting that a price increase next year will not cause unit sales to decrease. What effect would this price increase have on the following items for next year?

Answer 4

Contribution margin ratio: increase
Break-even point: decrease

Question 5

The contribution margin ratio is equal to:

Answer 5

(sales - variable expenses)/ sales.

Question 6

The contribution margin ratio always increases when the:

Answer 6

variable expenses as a percentage of net sales decrease.

Question 7

In the middle of the year, the price of Lake Corporation’s major raw material increased by 8%. How would this increase affect the company’s break-even point and margin of safety?

Answer 7

Break-even point: increase
margin of safety: decrease

Question 8

A $2.00 increase in a product’s variable expense per unit accompanied by a $2.00 increase in its selling price per unit will:

Answer 8

have no effect on the break-even volume.

Question 9

The break-even point in unit sales is found by dividing total fixed expenses by:

Answer 9

the contribution margin per unit.

Question 10

Which of the following would not affect the break-even point?

Answer 10

number of units sold

Question 11

If a company increases its selling price by $2 per unit due to an increase in its variable labor cost of $2 per unit, the break-even point in units will:

Answer 11

not change.

Question 12

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

Answer 12

(fixed expenses + target net profit)/ contribution margin ratio

Question 13

Salinas Corporation has a degree of operating leverage of 8. This means that a 1% change in sales dollars at Salinas will generate an 8% change in:

Answer 13

net operating income.

Question 14

In calculating the break-even point for a multi-product company, which of the following assumptions are commonly made?

I. Selling prices are constant.
II. variable expenses are constant per unit.
III. The sales mix is constant.

Answer 14

I, II, III

Question 15

last year, variable expenses were 60% of total sales and fixed expenses were 10% of total sales. If the company increases its selling prices by 10%, but if fixed expenses, variable costs per unit, and unit sales remain unchanged, the effect of the increase in selling price on the company’s total contribution margin would be:

Answer 15

an increase of 25%

Question 16

The unit contribution margins of Product X and Product Y are $10 and $, respectively. Total fixed expenses will be the same regardless of which product is produced and sold. Which of the following statements will always be true:

Answer 16

less units would be required to break even if only Product X is sold than if only Product Y is sold.