COB 242 - Unit 3

Contribution Margin:

• is first used to cover variable expenses

• equals sales minus fixed expenses

• becomes profit after fixed expenses are covered

• is not affected by changes in activity

Which of the following are assumptions of cost-volume-profit analysis?

• In multi product companies, the sales mix is constant

• Costs are linear and can be accurately divided into variable and fixed elements

• Fixed costs per unit stay the same within the relevant range

• Variable costs per unit increase over the relevant range of activity

The break-even point is reached when the contribution margin is equal to:

• total sales

• total variable expenses

• profit

• total fixed expenses

When constructing a CVP graph, the vertical axis represents:

• fixed costs

• unit volume

• variable costs

• dollars

The vertical distance between the total revenue line and the total expense line on a CVP graph represents the total

• profit or loss

• gross margin

• contribution margin

• units sold

When preparing a CVP graph, the horizontal axis represents:

• sales dollars

• variable costs

• total costs

• unit volume

The calculation of contribution margin (CM) ratio is

• net operating income ÷ total contribution margin

• variable expenses ÷ contribution margin

• contribution margin ÷ sales

• contribution margin ÷ total expenses

A company has a target profit of $204,000. The company's fixed costs are $305,000. The contribution margin per unit is $40. The BREAK-EVEN point in unit sales is ____.

• 7,625

• 5,100

• 12,725

• 1,495

A company with a high ratio of fixed costs:

• is more likely to experience a loss when sales are down than a company with mostly variable costs

• is more likely to experience greater profits when sales are up than a company with mostly variable costs

• will not be concerned about fluctuating sales

• will be able to avoid some of the fixed costs when sales decrease by lowering production

Operating leverage is a measure of how sensitive _____ is to a given percentage of change in sales dollars.

• total gross margin

• selling price per unit

• net operating income

• total variable expense