Which of the following statements describes fixed costs?
costs that remain constant in total dollar amount as the level of activity changes
CM Inc.'s sales are 40,000 units at $12 per unit, variable costs are $8 per unit, and fixed costs are $50,000. What is CM's contribution margin ratio?
33%
Step 1: 12 - 8= 4
Step 2: 4/ 12
B-E Co.'s fixed costs are $120,000, unit selling price is $30, and unit variable cost is $18. What is B-E's break-even point in units?
10,000
Step 1: 30 - 18= 12
Step 2: 120,000/ 12
Which of the following is a primary assumption of cost-volume-profit analysis?
a. costs can be accurately divided into fixed and variable components
b. within the relevant range, the efficiency of operations does not change
c. sales mix is constant
all of these answers
What term is used to describe a cost which has characteristics of both a variable and fixed cost?
mixed cost
If Berkson Inc.'s costs at 150,000 units of production are $240,000 (the high point of production) and $152,500 at 80,000 units of production (the low point of production), the variable cost per unit using the high-low method of cost estimation is:
$1.25
(240,000 - 152,500)/ (150,000 - 80,000)
Which of the following changes would have the effect of increasing the break-even point for a business?
a decrease in unit selling price
Which of the following costs will be classified as a fixed cost in cost-volume-profit analysis?
real estate taxes
If the contribution margin is $16 and fixed costs are $400,000, what is the break-even point in units?
25,000
400,000/ 16
If sales are $300,000 and sales at the break-even point are $250,000, what is the margin of safety?
17%
(300,000 - 250,000)/ 300,000
If for Jones Inc. the contribution margin is $200,000 and operating income is $40,000, what is the operating leverage?
5
200,000/ 40,000
In cost-volume-profit analysis, variable costs are costs that:
remain the same per unit at different activity levels
Most operating decisions by management focus on a range of activity, known as the relevant range, within which management plans to operate.
TRUE
The high-low method can be used to estimate the fixed cost and variable cost components of a mixed cost.
TRUE
Using the high-low method, the fixed costs will differ at the highest and lowest levels of activity.
FALSE
The point in the operations of a business at which revenues and expired costs are equal is called the break-even point.
TRUE
The data required to compute the break-even point are (1) total estimated fixed costs for a future period and (2) the unit contribution margin.
TRUE
Decreases in the unit selling price will decrease the break-even point.
FALSE
Decreases in fixed costs will increase the break-even point.
FALSE
The operating leverage is determined by dividing the income from operations by the sales dollars at break-even.
FALSE
Costs that vary in total dollar amount as the level of activity changes.
Variable Costs
Sales less variable cost of goods sold and variable selling and administrative expenses.
Contribution Margin
A measure of activity that is thought to cause a cost; used in analyzing and classifying cost behavior.
Activity Bases (drivers)
The percentage of each sales dollar that is available to cover the fixed costs and provide income from operations.
Contribution Margin Ratio
Costs that tend to remain the same in amount, regardless of variations in the level of activity.
Fixed Costs
The range of activity over which changes in cost are of interest to management.
Relevant Range
A technique that uses the highest and lowest total cost as a basis for estimating the variable cost per unit and the fixed cost component of a mixed cost.
High - Low Method
The level of business operations at which revenues and expired costs are equal.
Break - Even Point
The systematic examination of the relationships among costs, expenses, sales, and operating profit or loss.
Cost - Volume - Profit Analysis
The manner in which a cost changes in relation to its activity base (driver).
Cost Behavior
A chart used to assist management in understanding the relationships among costs, expenses, sales, and operating profit or loss.
Cost - Volume - Profit Chart
The dollars available from each unit of sales to cover fixed costs and provide income from operations.
Unit Contribution Margin
A chart used to assist management in understanding the relationship between profit and volume.
Profit - Volume Chart
A cost with both variable and fixed characteristics.
Mixed Cost
The difference between current sales revenue and the sales at the break-even point.
Margin of Safety
The relative distribution of sales among the various products available for sale.
Sales Mix
A measure of the relative mix of a business's variable costs and fixed costs, computed as contribution margin divided by income from operations
Operating Leverage
A method of reporting variable and fixed costs that includes only the variable manufacturing costs in the cost of the product.
Variable Costing