Cost-volume-profit analysis is often referred to as break-even analysis.
True / False
True
A cost that remains unchanged in total within a relevant range of operations, yet decreases per unit of product as production accelerates, is known as a variable cost.
True / False
False
Variable costs change in proportion to changes in volume and, as a result, are shown on a graph as curvilinear line.
True / False
False
A mixed cost is a combination (or acts as if it contains a combination) of fixed and variable costs.
True / False
True
In cost-volume-profit analysis, some costs which do not have the characteristics of fixed or variable costs are treated as either fixed or variable for the purposes of the analysis.
True / False
True
When a factory hires a new supervisor every time it adds a shift to its production line, the salaries of the supervisors would be classified as a stair-step cost.
True / False
True
Variable costs and nonlinear costs are plotted on graphs as straight lines with a positive slope.
True / False
False
Curvilinear costs are linear in nature.
True / False
False
One of the simplest methods of analyzing fixed and variable costs is to use a scatter diagram, which requires a hand drawn 'best fit' line which begins on the vertical axis at the level of total fixed costs, then slopes upward along the horizontal axis to illustrate the slope of the variable cost line.
True / False
True
Using the high-low method to draw an estimated line of cost behaviour on a scatter diagram will result in a very precise line of estimated cost behaviour.
True / False
False
A method of estimating cost behaviour in which a line is drawn between the highest and lowest total costs plotted on a scatter diagram is known as the least-squares regression method.
True / False
False
The least-squares regression method is a statistical method for deriving an estimated line of cost behaviour that is more precise than the high-low method.
True / False
True
When a company's total contribution margin is $200,000 at the break-even point, its fixed costs are greater than $200,000.
True / False
False
If one unit of product produces $2.00 of contribution margin when sold, and fixed costs amount to $190, the pre-tax profit on the sale of 100 units will be $10 (assuming taxes are not included in the determination of contribution margin or fixed costs).
True / False
True
When the variable costs are 60% of sales dollars, the contribution ratio is 40%.
True / False
True
If the contribution margin is $45,000 at the break-even point, the fixed costs must be $45,000.
True / False
True
If the contribution ratio for a product is 65%, then the variable costs of the product are 35% of the sales price of the product.
True / False
True
When the selling price of a unit is $10 and the variable costs to make and sell the unit are $6, the contribution ratio is 40.0%.
True / False
True
One of the assumptions for cost-volume-profit analysis is that the selling price per unit remains unchanged for all units sold during the planning period.
True / False
True
While curvilinear costs are not illustrated as straight lines on a CVP graph, they tend to be nearly straight within the relevant range of operations.
True / False
True
If fixed costs are $10,000 and the variable cost per unit is $2, then expected sales of 20,000 units at $4 each should generate income (before taxes) of $30,000.
True / False
True
It is not possible to estimate the dollar of sales required to achieve a target income, after taxes, using CVP analysis.
True / False
False
If the current level of sales if $450,000 and the break-even point is $300,000, the margin of safety is 50%.
True / False
False
The profit of a company is equal to its margin of safety.
True / False
False
A company with current sales of $450,000 and a break-even point of $460,000 has a $10,000 margin of safety.
True / False
False
It is not possible to apply break-even analysis to firms that sell more than one product, when each product has a different variable cost.
True / False
False
If the degree of operating leverage is 1.5, then a 10% increase in sales (within the relevant range of operations) will result in a 150% increase in income.
True / False
False
When total sales revenue is equal to total fixed costs, a company has reached its ________________ point.
BREAK-EVEN
The amount that the sale of one unit contributes toward recovering fixed costs and profit is called the ________________ margin per unit
CONTRIBUTION
When the contribution margin per unit is expressed as a percentage of the product's selling price it is called the contribution margin ________________.
RATIO
Predicting the volume of activity, the costs to be incurred, revenues to be received, and profits to be earned is called CVP or ________________ analysis.
COST-VOLUME-PROFIT
A cost that changes with volume but not at a constant rate like pure variable costs is called a ________________ cost
CURVILINEAR
A ________________ cost remains unchanged in total amount even when production volume varies from period to period.
FIXED
A method of drawing an estimated line of cost behaviour which connects the highest and lowest costs on a scatter diagram with a straight line is called the ________________ method.
HIGH-LOW
A method for deriving an estimated line of cost behaviour that is more precise than the high-low method is the ________________ regression statistical method.
LEAST-SQUARES
If company sales are $450,000 and break-even sales are $375,000, the $75,000 excess can be called the ________________.
MARGIN of SAFETY
Sales personnel receive an hourly wage plus a commission on sales in excess of $10,000. The sales salary expense account which includes the hourly pay and the commissions is an example of a ________________ cost.
MIXED
The range of sales volume that a business recognizes as its normal operating range is called the ________________ of operations.
RELEVANT RANGE
A company sells 6 tons of concrete mix, 3 tons of decorative rock, and 1 ton of structural rock for every 10 tons of product it sells. The sales ratio (6:3:1) of volumes of the various products is called the company's ________________.
SALES MIX
The cost of direct materials is $4 per unit. As production increases, the total cost of direct material will increase proportionately, since direct material is an example of a ________________ cost.
VARIABLE
The unique sales level at which a company neither earns a profit nor incurs a loss.
Break-even point
The amount that the sale of one unit contributes toward recovering fixed costs and profit.
Contribution margin per unit
The contribution margin per unit expressed as a percentage of the product's selling price.
Contribution margin ratio
The first step in the planning phase is predicting the volume of activity, the costs to be incurred, revenues to be received, and profits to be earned.
Cost-volume-profit analysis
A cost that changes with volume but not at a constant rate like pure variable costs.
Curvilinear cost
A graphic representation of the cost-volume-profit relationships.
CVP chart
A line on a scatter diagram drawn to identify the past relationship between cost and sales volume.
Estimated line of cost behaviour
A simple way to draw an estimated line of cost behaviour by connecting the highest and lowest costs on a scatter diagram with a straight line.
High-low method
A statistical method for deriving an estimated line of cost behaviour that is more precise than the high-low method.
Least-squares regression
The excess of expected sales over the sales at the break-even point.
Margin of safety
A cost that behaves like a combination of a fixed and a variable cost.
Mixed cost
A business's normal operating range; excludes extremely high and low volumes that are not likely to be encountered.
Relevant range of operations
A graph used to display data about past cost behaviours and volumes for each period as points on the diagram.
Scatter diagram
A cost that remains fixed over limited ranges of volumes but increases by a lump sum when volume increases beyond maximum amounts.
Step-wise cost
A cost that changes in proportion to changes in production volume.
Variable cost
How do you calculate Contribution Margin/units?
CM/units = SP/units - VC/units
How do we calculate CM ratio?
CM ratio = Contribution margin/Sales
How do we calculate Break-Even in units?
BE in units = Fixed costs/(CM/unit)
How do we calculate Break-Even in sales dollars?
BE in Sales $ = Fixed costs/CM ratio
How do we calculate Target Operating Income in units?
Target OI in units = (Fixed costs + Target operating income)/(CM/unit)
How do we calculate Target Operating Income in sales dollars?
Target OI in Sales $ = (Fixed costs + Target operating income)/(CM ratio)
How do we calculate the Margin of Safety (MoS)?
MoS = Budgeted Sales (Actual Sales) - Break-Even Sales
How do we calculate Margin of Safety (MoS) in units?
MoS in units = MoS/(Selling Price per unit)
How do we calculate the Margin of Safety (MoS) ratio?
MoS ratio = MoS/Sales
How do we calculate Operating Leverage (OL)?
OL = Contribution margin/Operating Income
How else can we calculate Operating Income (OI)?
OI = Net operating income/(1 - Tax Rate)
OR
OI = Margin of Safety x CM ratio
How do we calculate Net Operating Income (NOI)?
NOI = Operating Income - Tax
How do you calculate Contribution Margin (CM)?
CM = Sales - Variable Costs
OR
CM = (Selling Price - Variable Costs) x Quantity
Break-even point:
The level of sales at which profit is zero. The break-even point can also be defined as the point where total sales equals total expenses or as the point where total contribution margin equals total fixed expenses.
Contribution margin method:
A method of computing the break-even point in which the fixed expenses are divided by the contribution margin per unit.
Contribution margin ratio (CM ratio):
The contribution margin as a percentage of total sales.
Cost-volume-profit (CVP) graph:
The relations between revenues, costs, and level of activity in an organization presented in graphic form.
Degree of operating leverage:
A measure, at a given level of sales, of how a percentage change in sales volume will affect profits. The degree of operating leverage is computed by dividing contribution margin by net income.
Equation method:
A method of computing the break-even point that relies on the equation:
Sales = Variable expenses + Fixed expenses + Profits
Incremental analysis:
An analytical approach that focuses only on those items of revenue, cost, and volume that will change as a result of a decision.
Margin of safety:
The excess of budgeted (or actual) sales over the break-even volume of sales.
Operating leverage:
A measure of how sensitive net income is to a given percentage change in sales. It is computed by dividing the contribution margin by net income.
Sales mix:
The relative proportions in which a company's products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.
