Review Questions

7-1. Briefly explain each of the following methods of computing a break-even point in units: (a) contribution-margin approach, (b) equation approach, and (c) graphical approach.

7-2. What is the meaning of the term unit contribution margin? Contribution to what?

7-3. What information is conveyed by a cost-volume-profit graph in addition to a company's break-even point?

7-4. What does the term safety margin mean?

7-5. Suppose the fixed expenses of a travel agency increase. What will happen to its break-even point, measured in number of clients served? Why?

7-6. Delmarva Oyster Company has been able to decrease its variable expenses per pound of oysters harvested. How will this affect the firm's break-even sales volume?

7-7. In a strategy meeting, a manufacturing company's president said, "If we raise the price of our product, the company's break-even point will be lower." The financial vice president responded by saying, "Then we should raise our price. The company will be less likely to incur a loss." Do you agree with the president?

Why? Do you agree with the financial vice president? Why?

7-8. What will happen to a company's break-even point if the sales price and unit variable cost of its only product increase by the same dollar amount?

7-9. An art museum covers its operating expenses by charging a small admission fee.

The objective of the nonprofit organization is to break even. A local arts enthusiast has just pledged an annual donation of $10,000 to the museum. How will the donation affect the museum's break-even attendance level?

7-10. How can a profit-volume graph be used to predict a company's profit for a particular sales volume?

7-11. List the most important assumptions of cost-volume-profit analysis.

7-12. Why do many operating managers prefer a contribution income statement instead of a waditional income statement?

7-13. What is the difference between a manufacturing company's gross margin and its total contribution margin? 7-14. East Company manufactures DVD players using a completely automated production process. West Company also manufactures DVD players, but its products are assembled manually. How will these two firms' cost structures differ?

Which company will have a higher operating leverage factor?

7-15. When sales volume increases, which company will experience a larger

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percentage increase in profit: company X, which has mostly fixed expenses, or company Y, which has mostly variable expenses?

7-16. What does the term sales mix mean? How is a weighted-average unit contribution margin computed?

7-17. A car rental agency rents subcompact, compact, and full-size automobiles. What assumptions would be made about the agency's sales mix for the purpose of a cost-volume-profit analysis?

7-18. How can a hotel's management use cost-volume-profit analysis to help in deciding on room rates?

7-19. How could cost-volume-profit analysis be used in budgeting? In making a decision about advertising?

7-20. Two companies have identical fixed expenses, unit variable expenses, and profits,

Yet one company has set a much lower price for its product. Explain how this can happen.

7-21. A company with an advanced manufacturing environment typically will have a higher break-even point, greater operating leverage, and larger safety margin than a labor-intensive firm. True or false? Explain.

7-22. Explain briefly how activity-based costing (ABC) affects cost-volume-profit analysis.