# ch05 - CHAPTER 5 COST-VOLUME-PROFIT ANALYSIS TRUE/FALSE 1...

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CHAPTER 5 COST-VOLUME-PROFIT ANALYSIS TRUE/FALSE 1. Unit contribution margin equals price less unit variable cost. LO1 – True 2. Contribution margin is not an appropriate measure for evaluating short-term decisions. LO1 – False Contribution margin is an appropriate measure for evaluating short-term decisions. 3. Both revenues and variable costs are proportional to sales volume. LO1 – True 4. For every unit sold, profit increases by an amount equal to the unit gross margin. LO1 – False For every unit sold, profit increases by an amount equal to the unit contribution margin. 5. Over the short-term, fixed costs do not change with the number of units sold. LO1 – True 6. Even when there are no sales, total costs include only variable costs. LO2 – False When there are no sales, revenues are zero and total costs equal fixed costs. 7. To have any chance of making a profit, a firm must have a positive unit contribution margin. LO2 – True 8. For every unit sold, both contribution margin and profit increase at the same rate, by an amount equal to the unit contribution margin. LO2 – True 9. The contribution margin ratio is simply the unit contribution margin divided by variable costs. LO2 – False The contribution margin ratio is simply the unit contribution margin divided by price. 10. The contribution margin ratio is the portion of every sales dollar that contributes toward covering fixed costs and, ultimately, to profit. LO2 – True 5-1

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11. In addition to planning profits, the CVP relation helps organizations make short-term decisions. LO3 – True 12. When all other factors remain the same, if a firm decides to decrease the selling price of its product, its unit contribution margin also decreases. LO3 – True 5-2
Cost-volume-Profit Analysis 13. If a firm decides to decrease the selling price of its product, the only way to increase overall profit is to offset the reduction in unit contribution margin by decreasing variable costs. LO3 – False If a firm decides to decrease the selling price of its product, its overall profit will increase only if the reduction in unit contribution margin is more than offset by the additional sales volume that price cuts typically generate. 14. Reducing price always increases demand of a product. LO3 – False Reducing the price too much could hurt profit. 15. CVP analysis allows firms to evaluate the tradeoff between price and quantity, and their effect on profit. LO3 – True 16. Breakeven volume = Unit Fixed costs ÷ Total contribution margin. LO4 – False Breakeven volume = Fixed costs ÷ Unit contribution margin. 17. Firms generally are reluctant to add fixed costs to their cost structure because fixed costs represent a sure outflow.

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## This note was uploaded on 04/06/2011 for the course ECON 3332 taught by Professor Craig during the Spring '11 term at Rensselaer Polytechnic Institute.

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ch05 - CHAPTER 5 COST-VOLUME-PROFIT ANALYSIS TRUE/FALSE 1...

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