True/False Questions
1. One way to compute the total contribution margin is to add total fixed expenses to
net operating income.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
2. On a CVP graph for a profitable company, the total revenue line will be steeper
than the total cost line.
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 2
AICPA BB: Critical Thinking
Level: Easy
3. In two companies making the same product and with the same total sales and total
expenses, the contribution margin ratio will be lower in the company with a
higher proportion of fixed expenses in its cost structure.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 3
AICPA BB: Critical Thinking
Level: Medium
4. If the variable expense per unit increases, and all other factors remain constant,
the contribution margin ratio will increase.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 3
AICPA BB: Critical Thinking
Level: Medium
5. The impact on net operating income of any given dollar change in total sales can
be estimated by multiplying the CM ratio by the dollar change in total sales.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
6. A company with sales of $70,000 and variable expenses of $40,000 should spend
$10,000 on increased advertising if the increased advertising will increase sales
by $20,000.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 4
AICPA BB: Critical Thinking
Level: Medium
7. The formula for the break-even point is the same as the formula to attain a given
target profit for the special case where the target profit is zero.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5; 6 Level: Medium
8. An increase in total fixed expenses will not affect the break-even point so long as
the contribution margin ratio remains unchanged.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 5
AICPA BB: Critical Thinking
Level: Medium
9. All other things the same, a reduction in the variable expense per unit will cause
the break-even point to rise.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 5
AICPA BB: Critical Thinking
Level: Medium
10. The unit sales volume necessary to reach a target profit is determined by dividing
the target profit by the contribution margin per unit.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 6 Level: Medium
11. All other things the same, the margin of safety in dollars at a given level of sales
will tend to be lower for a capital-intensive company than for a labor-intensive
company with high variable expenses.
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 7
AICPA BB: Critical Thinking
Level: Medium
12. The margin of safety in dollars equals the excess of budgeted (or actual) sales
over the break-even volume of sales.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Easy
13. A company with high operating leverage will experience a lower reduction in net
operating income in a period of declining sales than will a company with low
operating leverage.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 8
AICPA BB: Critical Thinking
Level: Medium
14. If Q is the quantity of a product sold, P is the price per unit, V is the variable
expense per unit, and F is the total fixed expense, then the degree of operating
leverage is equal to: [Q(P-V)] ÷ [Q(P-V)-F]
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 8
AICPA BB: Critical Thinking
Level: Hard
15. A shift in the sales mix from products with high contribution margin ratios toward
products with low contribution margin ratios will raise the break-even point.
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 9
AICPA BB: Critical Thinking
Level: Medium
Multiple Choice Questions
16. Contribution margin can be defined as:
A) the amount of sales revenue necessary to cover variable expenses.
B) sales revenue minus fixed expenses.
C) the amount of sales revenue necessary to cover fixed and variable expenses.
D) sales revenue minus variable expenses.
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
17. Which of the following statements is correct with regard to a CVP graph?
A) A CVP graph shows the maximum possible profit.
B) A CVP graph shows the break-even point as the intersection of the total
sales revenue line and the total expense line.
C) A CVP graph assumes that total expense varies in direct proportion to unit
sales.
D) A CVP graph shows the operating leverage as the gap between total sales
revenue and total expense at the actual level of sales.
Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
18. If both the fixed and variable expenses associated with a product decrease, what
will be the effect on the contribution margin ratio and the break-even point,
respectively?
A)
B)
C)
D)
Contribution margin ratio Break-even point
Decrease
Increase
Increase
Decrease
Decrease
Decrease
Increase
Increase
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3; 5 Level: Medium Source: CMA; adapted
19. Which of the following is true regarding the contribution margin ratio of a single
product company?
A) As fixed expenses decrease, the contribution margin ratio increases.
B) The contribution margin ratio multiplied by the selling price per unit equals
the contribution margin per unit.
C) The contribution margin ratio will decline as unit sales decline.
D) The contribution margin ratio equals the selling price per unit less the
variable expense ratio.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
20. If a company is operating at the break-even point:
A) its contribution margin will be equal to its variable expenses.
B) its margin of safety will be equal to zero.
C) its fixed expenses will be equal to its variable expenses.
D) its selling price will be equal to its variable expense per unit.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5; 7 Level: Medium
21. At the break-even point:
A) sales would be equal to contribution margin.
B) contribution margin would be equal to fixed expenses.
C) contribution margin would be equal to net operating income.
D) sales would be equal to fixed expenses.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Medium
22. The break-even point would be increased by:
A) a decrease in total fixed expenses.
B) a decrease in the ratio of variable expenses to sales.
C) an increase in the contribution margin ratio.
D) none of these.
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Medium
23. Which of the following strategies could be used to reduce the break-even point?
A)
B)
C)
D)
Fixed expenses Contribution margin
Increase
Increase
Decrease
Decrease
Decrease
Increase
Increase
Decrease
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Easy
24. Break-even analysis assumes that:
A) Total revenue is constant.
B) Unit variable expense is constant.
C) Unit fixed expense is constant.
D) Selling prices must fall in order to generate more revenue.
Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 5 Level: Easy
25. Target profit analysis is used to answer which of the following questions?
A) What sales volume is needed to cover all expenses?
B) What sales volume is needed to cover fixed expenses?
C) What sales volume is needed to earn a specific amount of net operating
income?
D) What sales volume is needed to avoid a loss?
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 6 Level: Easy
26. The margin of safety can be calculated by:
A) Sales − (Fixed expenses/Contribution margin ratio).
B) Sales − (Fixed expenses/Variable expense per unit).
C) Sales − (Fixed expenses + Variable expenses).
D) Sales − Net operating income.
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 7 Level: Medium
27. If the degree of operating leverage is 4, then a one percent change in quantity sold
should result in a four percent change in:
A) unit contribution margin.
B) revenue.
C) variable expense.
D) net operating income.
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 8 Level: Easy Source: CMA; adapted
28. Which of the following is the correct calculation for the degree of operating
leverage?
A) net operating income divided by total expenses.
B) net operating income divided by total contribution margin.
C) total contribution margin divided by net operating income.
D) variable expense divided by total contribution margin.
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 8 Level: Easy
29. Which of the following is an assumption underlying standard CVP analysis?
A) In multiproduct companies, the sales mix is constant.
B) In manufacturing companies, inventories always change.
C) The price of a product or service is expected to change as volume changes.
D) Fixed expenses will change as volume increases.
Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 9 Level: Easy
30. Hopi Corporation expects the following operating results for next year:
Sales ..........................................................
Margin of safety ........................................
Contribution margin ratio ..........................
Degree of operating leverage ....................
$400,000
$100,000
75%
4
What is Hopi expecting total fixed expenses to be next year?
A) $75,000
B) $100,000
C) $200,000
D) $225,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1; 3; 8 Level: Hard
Solution:
Current sales - Breakeven sales = Margin of safety
Substituting the given information into the above equation, we will have:
$400,000 − Breakeven sales = $100,000
Breakeven sales = $300,000
Breakeven sales = Fixed expenses ÷ Contribution margin ratio
Substituting the given information into the above equation, we will have:
$300,000 = Fixed expenses ÷ 0.75
Fixed expenses = $225,000
31. Escareno Corporation has provided its contribution format income statement for
June. The company produces and sells a single product.
Sales (8,400 units) .........................
Variable expenses..........................
Contribution margin ......................
Fixed expenses ..............................
Net operating income ....................
$764,400
445,200
319,200
250,900
$ 68,300
If the company sells 8,200 units, its total contribution margin should be closest to:
A) $301,000
B) $311,600
C) $319,200
D) $66,674
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Current contribution margin ÷ Current sales in units = Contribution margin per
unit
$319,200 ÷ 8,400 = $38 contribution margin per unit
If 8,200 units are sold, the total contribution margin will be 8,200 × $38, or
$311,600.
32. Rovinsky Corporation, a company that produces and sells a single product, has
provided its contribution format income statement for November.
Sales (5,700 units) .............
Variable expenses..............
Contribution margin ..........
Fixed expenses ..................
Net operating income ........
$319,200
188,100
131,100
106,500
$ 24,600
If the company sells 5,300 units, its net operating income should be closest to:
A) $24,600
B) $2,200
C) $22,874
D) $15,400
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy