Chapter 7
1. A shift in the sales mix from products with a low contribution margin ratio toward
products with a high contribution margin ratio will lower the break-even point in the
company as a whole.
Ans: True Difficulty: Medium
2. The break-even point in units can be obtained by dividing total fixed expenses by the
contribution margin ratio.
Ans: False Difficulty: Medium
3. In two companies making the same product and with the same total sales and total
expenses, the contribution margin ratio will tend to be lower in the company with a
higher proportion of fixed expenses in its cost structure.
Ans: False Difficulty: Medium
4. For a given level of sales, a low contribution margin ratio will produce less operating
income than a high contribution margin ratio.
Ans: True Difficulty: Medium
5. Once the break-even point has been reached, increases in contribution margin will be
reflected dollar for dollar in increased operating income.
Ans: True Difficulty: Easy
6. The formula for the break-even point is the same as the formula to attain a given target
operating profit for the special case where the target operating profit is zero.
Ans: True Difficulty: Medium
7. At the break-even point: Sales - Variable expenses = Fixed expenses.
Ans: True Difficulty: Easy
8. If fixed expenses increase by $10,000 per year, then the level of sales needed to break
even will also increase by $10,000.
Ans: False Difficulty: Medium
9. The total volume in sales dollars that would be required to attain a given target operating
profit is determined by dividing the sum of the fixed expenses and the target operating
profit by the contribution margin ratio.
Ans: True Difficulty: Easy
10. A company with sales of $80,000 and variable expenses of $40,000 should spend
$12,000 on increased advertising, if the increased advertising will increase sales by
$22,000.
Ans: False Difficulty: Medium
Page 1
,11. If the fixed expenses increase in a company, and all other factors remain unchanged, then
one would expect the margin of safety to decrease.
Ans: True Difficulty: Medium
12. The margin of safety percentage is equal to the margin of safety in dollars divided by
total sales in dollars.
Ans: True Difficulty: Easy
13. If two companies produce the same product and have the same total sales and same total
expenses, operating leverage will be lower in the company with a higher proportion of
fixed expenses in its cost structure.
Ans: False Difficulty: Medium
14. A company with an income tax rate of 40% and an objective of an after-tax target
operating profit of $48,000 should generate a before-tax target operating profit of
$120,000.
Ans: False Difficulty: Medium
15. A company with a degree of operating leverage of 4 would expect income to increase by
200% if sales increased from $100,000 to $150,000.
Ans: True Difficulty: Easy
16. Which of the following is defined as the difference between total sales in dollars and total
variable expenses?
A) Margin of safety. C) The gross margin.
B) Operating income. D) The contribution margin.
Ans: D Difficulty: Easy
17. Brasher Company manufactures and sells a single product that has a positive contribution
margin. If the selling price and variable expenses both decrease by 5% and fixed
expenses do not change, then what would be the effect on the contribution margin per
unit and the contribution margin ratio?
Contribution Contribution
Margin per Unit Margin Ratio
A) Decrease Decrease
B) Decrease No change
C) No change Decrease
D) No change No change
Ans: B
Difficulty: Hard
, Chapter 7, Cost-Volume-Profit Relationships
18. Once the break-even point is reached, which of the following statements is true?
A) The total contribution margin changes from negative to positive.
B) Operating income will increase by the unit contribution margin for each additional
item sold.
C) Variable expenses will remain constant in total.
D) The contribution margin ratio begins to decrease.
Ans: B Difficulty: Easy
19. The contribution margin ratio always increases when which of the following occurs?
A) Variable expenses as a percentage of sales increase.
B) Variable expenses as a percentage of sales decrease.
C) Break-even point increases.
D) Break-even point decreases.
Ans: B Difficulty: Medium
20. If the fixed expenses of a product increase while variable expenses and the selling price
remain constant, what will happen to the total contribution margin and the break-even
point?
Contribution Margin Break-even Point
A) Increase Decrease
B) Decrease Increase
C) Unchanged Increase
D) Unchanged Unchanged
Ans: C
Difficulty: Medium
21. The total contribution margin decreases if sales volume remains the same and which of
the following occurs?
A) Fixed expenses increase. C) Variable expense per unit increases.
B) Fixed expenses decrease. D) Variable expense per unit decreases.
Ans: C Difficulty: Easy
22. The break-even in units sold will decrease if there is an increase in which of the
following?
A) Unit sales volume. C) Unit variable expenses.
B) Total fixed expenses. D) Selling price.
Ans: D Difficulty: Easy
23. Which of the following statements is assumed to be true with break-even analysis?
A) Total costs are unchanged.
Page 3
, B) Unit variable expenses are unchanged.
C) Variable expenses are nonlinear.
D) Unit fixed expenses are unchanged.
Ans: B Difficulty: Easy
24. A company increased the selling price for its product from $1.00 to $1.10 a unit when
total fixed expenses increased from $400,000 to $480,000 and the variable expense per
unit remained unchanged. How would these changes affect the break-even point?
A) The break-even point in units would increase.
B) The break-even point in units would decrease.
C) The break-even point in units would remain unchanged.
D) The effect cannot be determined from the information given.
Ans: D Difficulty: Hard
25. Which of the following is defined as the ratio of fixed expenses to the unit contribution
margin?
A) Break-even point in unit sales. C) Contribution margin ratio.
B) Profit margin. D) Margin of safety.
Ans: A Difficulty: Easy
26. The break-even point in unit sales increases when variable expenses do which of the
following?
A) Increase, and the selling price remains unchanged.
B) Decrease, and the selling price remains unchanged.
C) Decrease, and the selling price increases.
D) Remain unchanged, and the selling price increases.
Ans: A Difficulty: Easy
27. How is the margin of safety percentage computed?
A) Break-even sales divided by Total sales.
B) Total sales minus Break-even sales.
C) (Total sales - Break-even sales) divided by Break-even sales.
D) (Total sales - Break-even sales) divided by Total sales.
Ans: D Difficulty: Easy
28. The margin of safety is equal to which of the following formulas?
A) Sales - Operating income.
B) Sales - (Variable expenses/Contribution margin).
C) Sales - (Fixed expenses/Contribution margin ratio).
D) Sales - (Variable expenses + Fixed expenses).
Ans: C Difficulty: Easy
1. A shift in the sales mix from products with a low contribution margin ratio toward
products with a high contribution margin ratio will lower the break-even point in the
company as a whole.
Ans: True Difficulty: Medium
2. The break-even point in units can be obtained by dividing total fixed expenses by the
contribution margin ratio.
Ans: False Difficulty: Medium
3. In two companies making the same product and with the same total sales and total
expenses, the contribution margin ratio will tend to be lower in the company with a
higher proportion of fixed expenses in its cost structure.
Ans: False Difficulty: Medium
4. For a given level of sales, a low contribution margin ratio will produce less operating
income than a high contribution margin ratio.
Ans: True Difficulty: Medium
5. Once the break-even point has been reached, increases in contribution margin will be
reflected dollar for dollar in increased operating income.
Ans: True Difficulty: Easy
6. The formula for the break-even point is the same as the formula to attain a given target
operating profit for the special case where the target operating profit is zero.
Ans: True Difficulty: Medium
7. At the break-even point: Sales - Variable expenses = Fixed expenses.
Ans: True Difficulty: Easy
8. If fixed expenses increase by $10,000 per year, then the level of sales needed to break
even will also increase by $10,000.
Ans: False Difficulty: Medium
9. The total volume in sales dollars that would be required to attain a given target operating
profit is determined by dividing the sum of the fixed expenses and the target operating
profit by the contribution margin ratio.
Ans: True Difficulty: Easy
10. A company with sales of $80,000 and variable expenses of $40,000 should spend
$12,000 on increased advertising, if the increased advertising will increase sales by
$22,000.
Ans: False Difficulty: Medium
Page 1
,11. If the fixed expenses increase in a company, and all other factors remain unchanged, then
one would expect the margin of safety to decrease.
Ans: True Difficulty: Medium
12. The margin of safety percentage is equal to the margin of safety in dollars divided by
total sales in dollars.
Ans: True Difficulty: Easy
13. If two companies produce the same product and have the same total sales and same total
expenses, operating leverage will be lower in the company with a higher proportion of
fixed expenses in its cost structure.
Ans: False Difficulty: Medium
14. A company with an income tax rate of 40% and an objective of an after-tax target
operating profit of $48,000 should generate a before-tax target operating profit of
$120,000.
Ans: False Difficulty: Medium
15. A company with a degree of operating leverage of 4 would expect income to increase by
200% if sales increased from $100,000 to $150,000.
Ans: True Difficulty: Easy
16. Which of the following is defined as the difference between total sales in dollars and total
variable expenses?
A) Margin of safety. C) The gross margin.
B) Operating income. D) The contribution margin.
Ans: D Difficulty: Easy
17. Brasher Company manufactures and sells a single product that has a positive contribution
margin. If the selling price and variable expenses both decrease by 5% and fixed
expenses do not change, then what would be the effect on the contribution margin per
unit and the contribution margin ratio?
Contribution Contribution
Margin per Unit Margin Ratio
A) Decrease Decrease
B) Decrease No change
C) No change Decrease
D) No change No change
Ans: B
Difficulty: Hard
, Chapter 7, Cost-Volume-Profit Relationships
18. Once the break-even point is reached, which of the following statements is true?
A) The total contribution margin changes from negative to positive.
B) Operating income will increase by the unit contribution margin for each additional
item sold.
C) Variable expenses will remain constant in total.
D) The contribution margin ratio begins to decrease.
Ans: B Difficulty: Easy
19. The contribution margin ratio always increases when which of the following occurs?
A) Variable expenses as a percentage of sales increase.
B) Variable expenses as a percentage of sales decrease.
C) Break-even point increases.
D) Break-even point decreases.
Ans: B Difficulty: Medium
20. If the fixed expenses of a product increase while variable expenses and the selling price
remain constant, what will happen to the total contribution margin and the break-even
point?
Contribution Margin Break-even Point
A) Increase Decrease
B) Decrease Increase
C) Unchanged Increase
D) Unchanged Unchanged
Ans: C
Difficulty: Medium
21. The total contribution margin decreases if sales volume remains the same and which of
the following occurs?
A) Fixed expenses increase. C) Variable expense per unit increases.
B) Fixed expenses decrease. D) Variable expense per unit decreases.
Ans: C Difficulty: Easy
22. The break-even in units sold will decrease if there is an increase in which of the
following?
A) Unit sales volume. C) Unit variable expenses.
B) Total fixed expenses. D) Selling price.
Ans: D Difficulty: Easy
23. Which of the following statements is assumed to be true with break-even analysis?
A) Total costs are unchanged.
Page 3
, B) Unit variable expenses are unchanged.
C) Variable expenses are nonlinear.
D) Unit fixed expenses are unchanged.
Ans: B Difficulty: Easy
24. A company increased the selling price for its product from $1.00 to $1.10 a unit when
total fixed expenses increased from $400,000 to $480,000 and the variable expense per
unit remained unchanged. How would these changes affect the break-even point?
A) The break-even point in units would increase.
B) The break-even point in units would decrease.
C) The break-even point in units would remain unchanged.
D) The effect cannot be determined from the information given.
Ans: D Difficulty: Hard
25. Which of the following is defined as the ratio of fixed expenses to the unit contribution
margin?
A) Break-even point in unit sales. C) Contribution margin ratio.
B) Profit margin. D) Margin of safety.
Ans: A Difficulty: Easy
26. The break-even point in unit sales increases when variable expenses do which of the
following?
A) Increase, and the selling price remains unchanged.
B) Decrease, and the selling price remains unchanged.
C) Decrease, and the selling price increases.
D) Remain unchanged, and the selling price increases.
Ans: A Difficulty: Easy
27. How is the margin of safety percentage computed?
A) Break-even sales divided by Total sales.
B) Total sales minus Break-even sales.
C) (Total sales - Break-even sales) divided by Break-even sales.
D) (Total sales - Break-even sales) divided by Total sales.
Ans: D Difficulty: Easy
28. The margin of safety is equal to which of the following formulas?
A) Sales - Operating income.
B) Sales - (Variable expenses/Contribution margin).
C) Sales - (Fixed expenses/Contribution margin ratio).
D) Sales - (Variable expenses + Fixed expenses).
Ans: C Difficulty: Easy
