Results for True/False Quiz

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You correctly answered 14 questions for a score of 51 percent.

51% 25-1. Cost-volume-profit analysis is often referred to as break-even analysis.

True / False

You answered correctly! Using cost-volume-profit analysis techniques

will reveal the break-even point. However, cost-profit-volume techniques
will reveal more than the break-even point of a firm.

25-2. A cost that remains unchanged in total within a relevant range of operations, yet
decreases per unit of product as production accelerates, is known as a variable cost.

True / False

Wrong. The correct answer is false. Fixed costs remain unchanged in

total from period to period. However, with each additional unit of product
produced, the fixed cost assigned to each unit decreases.

25-3. Variable costs change in proportion to changes in volume and, as a result, are
shown on a graph as curvilinear line.

True / False

Wrong. The correct answer is false. Variable costs are shown as a

straight line, with the beginning point at the zero cost level, which slopes
upward along the horizontal axis.

25-4. A mixed cost is a combination (or acts as if it contains a combination) of fixed

and variable costs.

True / False

You answered correctly! A mixed cost is a combination of fixed and

variable cost components. For cost-volume-profit analysis, the fixed and
variable cost portions of mixed costs must be separated.

25-5. In cost-volume-profit analysis, some costs which do not have the characteristics
of fixed or variable costs are treated as either fixed or variable for the purposes of the
analysis.

True / False

You answered correctly! One example of such a cost is a step-wise or

stair-step cost, a cost which remains fixed for a certain production volume,
then increases with the next level of volume.

25-6. When a factory hires a new supervisor every time it adds a shift to its production
line, the salaries of the supervisors would be classified as a stair-step cost.
 True / False

You answered correctly! A stair-step or step-wise cost is a cost that

remains constant over a range of production, then increases by a lump
sum if production is expanded beyond that range.

25-7. Variable costs and nonlinear costs are plotted on graphs as straight lines with a
positive slope.

True / False

Wrong. The correct answer is false. Variable costs are graphed as

straight lines. Nonlinear costs vary with production, as do variable costs,
but not in direct proportion. Therefore, nonlinear cost lines tend to be
curvilinear.

25-8. Curvilinear costs are linear in nature.

True / False

Wrong. The correct answer is false. Curvilinear costs increase as

volume increases but not at a constant ratio like pure variable costs. In
other words, curvilinear costs change with changes in production levels,
but not proportionately--they are nonlinear in nature.

25-9. One of the simplest methods of analyzing fixed and variable costs is to use a
scatter diagram, which requires a hand drawn 'best fit' line which begins on the
vertical axis at the level of total fixed costs, then slopes upward along the horizontal
axis to illustrate the slope of the variable cost line.

True / False

You answered correctly! The weaknesses in using a scatter diagram are

the estimates and judgment required on the part of the preparer which are
subject to interpretation.

25-10. Using the high-low method to draw an estimated line of cost behaviour on a
scatter diagram will result in a very precise line of estimated cost behaviour.

True / False

Wrong. The correct answer is false. The high-low method considers only
two plotted positions on the scatter diagram--the highest and the lowest,
either or both of which may be extremes and not typical of the conditions
of the other plotted positions.

25-11. A method of estimating cost behaviour in which a line is drawn between the
highest and lowest total costs plotted on a scatter diagram is known as the least-
squares regression method.

True / False

Wrong. The correct answer is false. The high-low method of estimating

cost behaviour is based on the assumption that the highest and lowest
costs shown on a scatter diagram can be connected with a line upon
which all of the costs between the high and low costs will fall.
25-12. The least-squares regression method is a statistical method for deriving an
estimated line of cost behaviour that is more precise than the high-low method.

True / False

You answered correctly! Least-squares regression is a method in which

all of the costs of each activity level within the period are plotted along a
line which, when determined with statistical analysis, is the best fit of the
cost behaviour.

25-13. When a company's total contribution margin is $200,000 at the break-even

point, its fixed costs are greater than $200,000.

True / False

Wrong. The correct answer is false. At the break-even point, the total
contribution margin is equal to the total fixed costs.

25-14. If one unit of product produces $2.00 of contribution margin when sold, and
fixed costs amount to $190, the pre-tax profit on the sale of 100 units will be $10
(assuming taxes are not included in the determination of contribution margin or fixed
costs).

True / False

You answered correctly! Contribution margin is the result of revenues

less all variable costs. It is used to recover fixed costs and add to net
profit: (100 x $2) - $190 = $10.

25-15. When the variable costs are 60% of sales dollars, the contribution ratio is 40%.

True / False

You answered correctly! The contribution ratio is the complement of the

variable costs expressed as a percent of sales dollars.

25-16. If the contribution margin is $45,000 at the break-even point, the fixed costs
must be $45,000.

True / False

You answered correctly! Contribution margin is the residual of revenues

less variable costs. At the break-even point, there must be a sufficient
amount of contribution margin to cover the fixed costs.

25-17. If the contribution ratio for a product is 65%, then the variable costs of the
product are 35% of the sales price of the product.

True / False

You answered correctly! The contribution ratio is the percent that the
contribution margin per unit is of the sales price per unit. The contribution
margin per unit is determined by subtracting the variable costs from the
sales price.
25-18. When the selling price of a unit is $10 and the variable costs to make and sell
the unit are $6, the contribution ratio is 40.0%.

True / False

You answered correctly! The contribution margin is $4 ($10 - $6) and the
contribution ratio (contribution margin/sales price) is 40% ($4 / $10).

25-19. One of the assumptions for cost-volume-profit analysis is that the selling price
per unit remains unchanged for all units sold during the planning period.

True / False

You answered correctly! While the statement is true, the assumptions

used in cost-volume-profit analysis are not always realistic; units selling
prices can change, the cost per unit can change, and fixed costs can
change over the planning period.

25-20. While curvilinear costs are not illustrated as straight lines on a CVP graph, they
tend to be nearly straight within the relevant range of operations.

True / False

You answered correctly! The relevant range of operations is the normal

operating range of the business which excludes extremely high and low
operating levels that are unlikely to occur.

25-21. If fixed costs are $10,000 and the variable cost per unit is $2, then expected
sales of 20,000 units at $4 each should generate income (before taxes) of $30,000.

True / False

You answered correctly! Income from expected sales can be determined

by subtracting fixed costs and variable costs (at the level of sales) from
sales. (20,000 x $4) - (20,000 x $2) - $10,000 = $30,000.

25-22. It is not possible to estimate the dollar of sales required to achieve a target
income, after taxes, using CVP analysis.

True / False

Wrong. The correct answer is false. The formula for estimating the dollar
sales required to achieve an after-tax target income is: Dollar Sales =
(Fixed Costs + Target Income + Income Taxes) / Contribution Margin
Ratio.

25-23. If the current level of sales if $450,000 and the break-even point is $300,000,
the margin of safety is 50%.

True / False

Wrong. The correct answer is false. The margin of safety can be shown
two ways: (1) as the difference between the current level of sales (when
sales exceed break-even) and the break-even point, or (2) as a percent of
the current level of sales (($450,000 - $300,000) / $450,000 = 0.333 =
33.3%).
 25-24. The profit of a company is equal to its margin of safety.

True / False

Wrong. The correct answer is false. The margin of safety is the

difference between the current level of sales (which exceeds break-even)
and the break-even point; and includes the variable costs and contribution
margin after break-even.

25-25. A company with current sales of $450,000 and a break-even point of $460,000
has a $10,000 margin of safety.

True / False

Wrong. The correct answer is false. The margin of safety is the amount
by which the current level of sales dollars exceeds the break-even point.
There is no margin of safety at sales levels less than the break-even point.

25-26. It is not possible to apply break-even analysis to firms that sell more than one
product, when each product has a different variable cost.

True / False

Wrong. The correct answer is false. A company that sells more than one
product can estimate the break-even point by using a composite unit
composed of specific numbers of units of each product in proportion to
their expected sales mix.

25-27. If the degree of operating leverage is 1.5, then a 10% increase in sales (within
the relevant range of operations) will result in a 150% increase in income.

True / False

Wrong. The correct answer is false. The degree of operating leverage

(DOL) multiplied by the anticipated change in sales determines the
increase in income. The increase in income will be 1.5 x 10%, or 15%.

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