Managerial Accounting and Cost Concepts chapter questions with answers

Chapter 6
Cost-Volume-Profit Relationships

True/False


1. To estimate what the profit will be at various levels of activity, a manager can simply take the number
of units to be sold over the break-even point and multiply that number by the unit contribution margin.
Level: Medium LO: 1 Ans: T


2. Incremental analysis is generally the simplest and most direct approach to decision making.
Level: Easy LO: 1 Ans: T


3. To facilitate decision-making, fixed expenses should be expressed on a per-unit basis.
Level: Medium LO: 1 Ans: F


4. One assumption in CVP analysis is that inventories do not change.
Level: Easy LO: 1 Ans: T


5. On a CVP graph for a profitable company, the total expense line will be steeper than the total revenue
line.
Level: Medium LO: 2 Ans: F


6. If sales volume increases, and all other factors remain unchanged, the contribution margin ratio will
decrease.
Level: Medium LO: 3 Ans: F


7. The break-even point for a capital intensive, automated company will tend to be higher than for a less
capital intensive company while the margin of safety will tend to be lower.
Level: Medium LO: 5,7 Ans: T


8. An increase in the number of units sold will decrease a company’s break-even point.
Level: Medium LO: 5 Ans: F


9. Assuming that the unit contribution margin is positive, a 10% decrease in selling price will increase the
break-even point in terms of unit sales more than will a 10% increase in the variable expense.
Level: Hard LO: 5 Ans: T


10. The break-even point is the point where total contribution margin equals total variable expenses.
Level: Medium LO: 5 Ans: F



Brewer, Introduction to Managerial Accounting, 3/e 279

,11. The break-even point can usually be determined by simply adding together all of the expenses from
the income statement.
Level: Medium LO: 5 Ans: F


12. Two companies with the same margin of safety in dollars will also have the same total contribution
margin.
Level: Medium LO: 7 Ans: F


13. If a company has high operating leverage, then profits will be very sensitive to changes in sales.
Level: Easy LO: 8 Ans: T


14. Operating leverage will decrease as the company’s margin of safety increases.
Level: Hard LO: 7,8 Ans: T


15. The overall contribution margin ratio for a company producing three products may be obtained by
adding the contribution margin ratios for the three products and dividing the total by three.
Level: Hard LO: 9 Ans: F


Multiple Choice


16. Which of the following is correct? The break-even point occurs on the CVP graph where:
A) total profit equals total expenses.
B) total profit equals total fixed expenses.
C) total contribution margin equals total fixed expenses.
D) total variable expenses equal total contribution margin.
Level: Medium LO: 1,2 Ans: C


17. If a company decreases 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:
A) shift upward and have a steeper slope.
B) shift upward and have a flatter slope.
C) shift downward and have a steeper slope.
D) shift downward and have a flatter slope.
Level: Medium LO: 2 Ans: C




280 Brewer, Introduction to Managerial Accounting, 3/e

,18. 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?




A) A above
B) B above
C) C above
D) D above
Source: CMA, adapted
Level: Medium LO: 3,4 Ans: C


19. 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?




A) A above
B) B above
C) C above
D) D above
Level: Medium LO: 3,5 Ans: A


20. The contribution margin ratio is equal to:
A) Total manufacturing expenses/Sales.
B) (Sales - Variable expenses)/Sales.
C) 1 - (Gross Margin/Sales).
D) 1 - (Contribution Margin/Sales).
Level: Medium LO: 3 Ans: B




Brewer, Introduction to Managerial Accounting, 3/e 281

, 21. The contribution margin ratio always increases when the:
A) break-even point increases.
B) break-even point decreases.
C) variable expenses as a percentage of net sales decrease.
D) variable expenses as a percentage of net sales increase.
Source: CPA, adapted
Level: Hard LO: 3 Ans: C


22. 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?




A) A above
B) B above
C) C above
D) D above
Level: Easy LO: 5,7 Ans: B


23. 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:
A) decrease the degree of operating leverage.
B) decrease the contribution margin.
C) have no effect on the break-even volume.
D) have no effect on the contribution margin ratio.
Level: Hard LO: 5,8 Ans: C


24. The break-even point in unit sales is found by dividing total fixed expenses by:
A) the contribution margin ratio.
B) the variable expenses per unit.
C) the sales price per unit.
D) the contribution margin per unit.
Level: Easy LO: 5 Ans: D


25. Which of the following would not affect the break-even point?
A) number of units sold
B) variable expense per unit
C) total fixed expenses
D) selling price per unit
Source: CMA, adapted
Level: Medium LO: 5 Ans: A




282 Brewer, Introduction to Managerial Accounting, 3/e