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.