Chapter 7
1. The break-even point is where total sales revenue equals total cost.
a. True
b. False
2. The contribution margin ratio can be calculated by subtracting the variable cost ratio from one.
a. True
b. False
3. Variable expense per unit consists only of direct materials, direct labor, and variable overhead.
a. True
b. False
Chapter 7
4. The break-even point in sales dollars is equal to the break-even units multiplied by cost.
a. True
b. False
5. If variable expenses decrease and the price increases, the break-even point decreases.
a. True
b. False
Chapter 7
6. Most firms would like to earn operating income equal to the break-even point.
a. True
b. False
7. In the equation to determine the number of units that must be sold to earn a target income, targeted income is subtracted
from fixed expense in the numerator.
a. True
b. False
Chapter 7
8. If one increases variable costs per unit, the break-even point will decrease.
a. True
b. False
9. The impact on a firm’s income resulting from a change in the number of units sold can be assessed by multiplying the
unit contribution margin by the change in units sold assuming that fixed costs remain the same.
a. True
b. False
Chapter 7
10. To find the number of units to sell to earn a targeted income, it is acceptable to simply adjust the break-even units
equation by adding target income to the variable cost.
a. True
b. False
11. To determine the number of units that must be sold to earn a target operating income, one can use the equation for
operating income and replace the operating income term with the target operating income.
a. True
b. False
Chapter 7
12. The contribution margin income statement provides a good check to determine if the sale of a certain number of units
really results in operating income of the given amount.
a. True
b. False
13. If fixed costs increase, the break-even point decreases.
a. True
b. False
Chapter 7
14. The linear equation for revenue is price multiplied by fixed cost.
a. True
b. False
Chapter 7
16. The cost-volume profit graph depicts the relationships among cost, volume, and profits, by plotting the total revenue
line and the total cost line on the graph.
a. True
b. False
17. It is possible to calculate the break-even point for individual products in a multiple product firm by separating the
common and direct fixed expenses.
a. True
b. False
Chapter 7
18. If a multi-product company simply wants to know the overall break-even point, it is easiest to use the break-even in
sales revenue approach.
a. True
b. False
19. In a multi-product firm, if the sales mix changes, the break-even points for each product will not change.
a. True
b. False
Chapter 7
20. Direct fixed expenses are the fixed costs that are not traceable to the segments and would remain even if one of the
segments was eliminated.
a. True
b. False
21. Common fixed expenses are the fixed costs that are traceable to the segments and would be avoided if the segment did
not exist.
a. True
b. False
Chapter 7
22. If the break-even point increases, the margin of safety increases.
a. True
b. False
23. Operating leverage is the use of fixed cost to extract higher percentage changes in profits as sales activity changes.
a. True
b. False
Chapter 7
24. The margin of safety measures the units sold or the revenue earned above the break-even volume.
a. True
b. False
25. Managers can use CVP analysis to handle risk and uncertainty.
a. True
b. False
26. The difference between sales and variable expenses is called the ______________________.
Chapter 7
27. The ________________________ is the point where total revenue equals total cost.
28. The ______________________ is the proportion of each sales dollar that must be used to cover variable costs.
Chapter 7
29. The _________________________ is the proportion of each sales dollar available to cover fixed costs and provide for
profit.
30. ___________________________________ is the income statement format that is based on the separation of costs into
fixed and variable components.
Chapter 7
31. ______________ gives us a way to determine how many units must be sold, or how much sales revenue must be
generated to earn a particular target income.
32. Assuming that fixed costs remain unchanged, the _____________________ can be used to find the profit impact of a
change in sales revenue.
33. The amount of income an organization is trying to achieve during a particular period is known as the _____________.
Chapter 7
34. The _________________________ depicts the relationships among cost, volume, and profits by plotting the total
revenue line and the total cost line on a graph.
35. ______________________ are those fixed costs that can be traced to each segment and would be avoided if the
segment did not exist.
Chapter 7
36. Fixed costs that are not traceable to the segments and would remain even if one of the segments was eliminated are
known as _____________________________.
37. __________ is the relative combination of products being sold by a firm.
Chapter 7
38. The _________________ is the units sold or the revenue earned above the break-even volume.
39. If the break-even volume for a company is 600 units and the company is currently selling 1,000 units than the 400
units would represent the company’s ____________________.
40. _____________________ is the use of fixed costs to extract higher percentage changes in profits as sales activity
changes.
Chapter 7
41. The _________________________________ can be measured for a given level of sales by taking the ratio of
contribution margin to operating income.
42. The quantity at which two systems produce the same operating income is referred to as the ___________________.
Chapter 7
43. The “what–if” process of altering certain key variables to assess the effect on the original outcome is also called a
__________________.
44. A company’s mix of fixed costs relative to variable costs is referred to as its _______________.
45. The break-even point is when
a. the company is operating at a loss.
b. total revenue equals total cost.
c. the company is earning a small profit.
d. total sales equal variable costs.