Question 1. The CVP income statement classifies costs as variable or fixed and computes a contribution margin

1. The CVP income statement classifies costs as variable or fixed and computes a contribution margin.

2. In CVP analysis, cost includes manufacturing costs but not selling and administrative expenses.

3. When a company is in its early stages of operation, its primary goal is to generate a target net income.

4. The margin of safety tells a company how far sales can drop before it will be operating at a loss.

5. Sales mix is a measure of the percentage increase in sales from period to period.

6. Sales mix is not important to managers when different products have substantially different contribution margins.

7. The weighted-average contribution margin of all the products is computed when determining the break-even sales for a multi-product firm.

8. If Buttercup, Inc. sells two products with a sales mix of 75% : 25%, and the respective contribution margins are $80 and $240, then weighted-average unit contribution margin is $120.

9. If fixed costs are $100,000 and weighted-average unit contribution margin is $50, then the break-even point in units is 2,000 units.

10. Net income can be increased or decreased by changing the sales mix.

11. The break-even point in dollars is variable costs divided by the weighted-average contribution margin ratio.

12. When a company has limited resources, management must decide which products to make and sell in order to maximize net income.

13. When a company has limited resources to manufacture products, it should manufacture those products which have the highest contribution margin per unit.

14. If a company has limited machine hours available for production, it is generally more profitable to produce and sell the product with the highest contribution margin per machine hour.

15. According to the theory of constraints, a company must identify its constraints and find ways to reduce or eliminate them.

16. Cost structure refers to the relative proportion of fixed versus variable costs that a company incurs.

17. Operating leverage refers to the extent to which a company’s net income reacts to a given change in fixed costs.

18. The degree of operating leverage provides a measure of a company’s earnings volatility.

19. If Sprinkle Industries has a margin of safety ratio of .60, it could sustain a 60 percent decline in sales before it would be operating at a loss.

20. A company with low operating leverage will experience a sharp increase in net income with a given increase in sales.

^a21. Variable costing is the approach used for external reporting under generally accepted accounting principles.

^a22. The difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead.

^a23. Selling and administrative costs are period costs under both absorption and variable costing.

^a24. Manufacturing cost per unit will be higher under variable costing than under absorption costing.

^a25. Some fixed manufacturing costs of the current period are deferred to future periods through ending inventory under variable costing.

^a26. When units produced exceed units sold, income under absorption costing is higher than income under variable costing.

^a27. When units sold exceed units produced, income under absorption costing is higher than income under variable costing.

^a28. When absorption costing is used for external reporting, variable costing can still be used for internal reporting purposes.

^a29. When absorption costing is used, management may be tempted to overproduce in a given period in order to increase net income.

^a30. The use of absorption costing facilitates cost-volume-profit analysis.

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