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CHAPTER 3 COST-VOLUME-PROFIT ANALYSIS TRUE/FALSE 1.To perform cost-volume-profit analysis, a company must be able to separate costs into fixed and variable components. Answer : True/False 2. It is assumed in CVP analysis that the unit selling price, unit variable costs, and unit fixed costs are known and constant. Answer : True/False 3. In CVP analysis, variable costs include direct variable costs, but do not include indirect variable costs. Answer : True/False 4. In CVP analysis, an assumption is made that the total revenues are linear with respect to output units, but that total costs are non-linear with respect to output units. Answer : True/False 5. If the selling price per unit is $20 and the contribution margin percentage is 30%, then the variable cost per unit must be $6. Answer : True/False 6.The selling price per unit is $30, variable cost per unit $20, and fixed cost per unit is $3. When this company operates above the breakeven point, the sale of one more unit will increase net income by $7. Answer : True/False 7. If the selling price per unit of a product is $50, variable costs per unit are $40, and total fixed costs are $50,000, a company must sell 6,000 units to make a target operating income of $10,000. Answer : True/False 3-1
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8. An increase in the tax rate will increase the breakeven point. Answer : True/False 9. If variable costs per unit increase, then the breakeven point will decrease. Answer : True/False 10. If a company increases fixed costs, then the breakeven point will be lower. Answer : True/False 11. Companies that are substituting fixed costs for variable costs receive a greater per unit return above the breakeven point. Answer : True/False 12. A company with a high degree of operating leverage is at lesser risk during downturns in the economy. Answer : True/False 13. If a company has a degree of operating leverage of 2.0, that means a 20% increase in sales will result in a 40% increase in variable costs. Answer : True/False 14. In multiproduct situations when sales mix shifts toward the product with the lowest contribution margin, the breakeven quantity will decrease. Answer : True/False 15. If a company’s sales mix is 2 units of product A for every 3 units of product B, and the company sells 1,000 units in total of both products, only 200 units of product A will be sold. Answer : True/False 16. There is no unique breakeven point when there are multiple cost drivers. Answer : True/False 3-2
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17. When there are multiple cost drivers the simple CVP formula of Q = (FC + OI)/ CMU can still be used. Answer : True/False 18. Service sector companies will never report gross margin on an income statement. Answer : True/False 19. For merchandising firms, contribution margin will always be a lesser amount than gross margin. Answer : True/False 20. If Johnson’s Manufacturing presented a Financial Accounting Income Statement emphasizing gross margin showing operating income of $18,000, a Contribution Income Statement emphasizing contribution margin would show a different operating income.
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