6

True/False Questions
1.One way to compute the total contribution margin is to add total fixed expenses to net
operating income.
Ans: True 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 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 Level: Medium
4.If the variable expense per unit increases, and all other factors remain constant, the
contribution margin ratio will increase.
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.
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.
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.
8.An increase in total fixed expenses will not affect the break-even point so long as the
contribution margin ratio remains unchanged.
9.All other things the same, a reduction in the variable expense per unit will cause the break-even
point to rise.
10.The unit sales volume necessary to reach a target profit is determined by dividing the target
profit by the contribution margin per unit.
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.
12.The margin of safety in dollars equals the excess of budgeted (or actual) sales over the break-
even volume of sales.
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.
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 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.
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 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 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?
Contribution margin ratio Break-even point

A) Decrease Increase
B) Increase Decrease
C) Decrease Decrease
D) Increase Increase
Ans: B Level: Medium

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.
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.
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.

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 Level: Medium
23.Which of the following strategies could be used to reduce the break-even point?
Fixed expenses Contribution margin

A) Increase Increase
B) Decrease Decrease
C) Decrease Increase
D) Increase Decrease
Ans: C 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 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 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 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: 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 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 Level: Easy

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True/False Questions

Multiple Choice Questions

Ans: D Level: Easy

17.Which of the following statements is correct with regard to a CVP graph?

Ans: B Level: Easy

Contribution margin ratio Break-even point

Ans: B Level: Medium

Ans: B Level: Medium

20.If a company is operating at the break-even point:

Ans: B Level: Medium

21.At the break-even point:

Ans: B Level: Medium

Ans: D Level: Medium

Fixed expenses Contribution margin

Ans: C Level: Easy

24.Break-even analysis assumes that:

25.Target profit analysis is used to answer which of the following questions?

Ans: C Level: Easy

Ans: A Level: Medium

Ans: Level: Easy Source: CMA; adapted

Ans: C Level: Easy

29.Which of the following is an assumption underlying standard CVP analysis?

Ans: A Level: Easy

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