True Or False

Question 1

Contribution margin is the excess of sales over variable costs, and this is the amount available for the recovery of fixed assets and generation of profit.

Answer 1

True

Question 2

Contribution margin ratio is also known as marginal income ratio or profit volume ratio.

Answer 2

True

Question 3

Break-even analysis is a technique employed in determining the sales level where revenue equals expenses or the point when the company earns zero profit.

Answer 3

True

Question 4

Variable costs are fixed per unit and fixed costs are variable per unit.

Answer 4

True.

Question 5

Relevant range refers to a band of activity within which sales and expense relationship may be valid.

Answer 5

False.
Relevant range refers to a band of activity within which sales and expense relationship are valid.

Question 6

Costs that tend to remain relatively constant per unit of output at different production levels are known as variable costs.

Answer 6

True

Question 7

Fixed costs are costs that do not change with changing levels of activity. In other words, fixed cost per unit remain constant regardless of the change in activity levels.

Answer 7

FALSE. Fixed cost per unit will change depending on the action level. It is the total fixed cost that would remain constant regardless of the action level.

Question 8

Some costs cannot be described by a single cost behavior pattern. These are called mixed costs, which possess both fixed and variable components.

Answer 8

True

Question 9

A typical example of a semi-variable costs that increase at an increasing rate is the learning curve cost.

Answer 9

FALSE. Learning curve is an example of semi-variable cost that increase at a decreasing rate

Question 10

The time assumption states that the cost behavior patterns are true only over a specific period of time.

Answer 10

True

Question 11

Using the high-low method, the rate of variability is determined by dividing the difference between the highest and lowest activity levels by the difference between the highest and lowest cost.

Answer 11

False.
Variability rate = Difference in cost ÷ Difference in Activity Level

Question 12

At break-even, contribution margin equal fixed cost.

Answer 12

True

Question 13

Like the break-even chart, the profit-volume graph shows the total cost and sales line.

Answer 13

FALSE.
Unlike the break-even chart, the profit volume graph does not show the total cost and sales lines.

Question 14

Margin of safety is the amount of sales which can still be decreased without resulting into a loss.

Answer 14

True

Question 15

Margin of safety ratio plus contribution margin ratio equals profit ratio.

Answer 15

FALSE.
Profit Ratio = Contribution Margin Ratio X Margin of Safety Ratio

Question 16

A proposed change in any of the of the profit factors is acceptable if it would result into an increase in profit and break-even point.

Answer 16

FALSE. A proposed change is acceptable if it would result into an increase in profit and a decrease in break-even point.

Question 17

A 10% change in selling price will cause a 10% change in total sales.

Answer 17

True

Question 18

When there is no change in fixed cost, the peso changes in total contribution margin due to the change in sales is equal to the change in profit.

Answer 18

True

Question 19

A 20% change in unit variable cost will cause a 20% change in total variable costs and total sales.

Answer 19

FALSE. Total sales will remain the same despite the total change in variable cost per unit.

Question 20

An increase in variable costs per unit increases the break-even point in units and in pesos.

Answer 20

True

Question 21

A 10% change in volume causes a 10% change in total sales, total variable cost and total contribution margin.

Answer 21

True

Question 22

An increase in fixed cost causes an increase in break-even point and a decrease in total profit.

Answer 22

True

Question 23

A 5% decrease in fixed cost will cause a 5% decrease in break-even point.

Answer 23

True. The percentage change in fixed cost is equal to percentage change in break-even point.

Question 24

To maximize profit, the sales mix ratio should be set such that the composite unit will involve the sale of more units of the products that give higher contribution margin.

Answer 24

FALSE. Product combination should be set…

Question 25

One of the assumptions underlying cost-volume-profit analysis is that there is no significant change in the inventory levels during the period under review.

Answer 25

True