Question

True or False:

1. A company with high operating leverage will experience a lower reduction in net operating income in a period of declining sales than will a company with low operating leverage

2. A shift in the sales mix from products with high contribution margin ratios towards products with low contribution margin ratios will raise the break-even point

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3. Which of the following is true regarding the contribution margin ratio of a single product company?

A. As fixed expenses decrease, the contribution margin ratio increases.

B. the contribution margin ratio multiplied by the selling price per unit equals the contribution margin per unit

C. The contribution margin ratio will decline as unit sales decline

D. The contribution margin ratio equals the selling price per unit less the variable expense ratio

PLEASE GIVE THOROUGH EXPLANATIONS

Answer 1

Solution 1:

False,  company with high operating leverage will experience a higher reduction in net operating income in a period of declining sales than will a company with low operating leverage

Solution 2:

True, A shift in the sales mix from products with high contribution margin ratios towards products with low contribution margin ratios will raise the break-even point because it will decrease overall contribution margin ratio.

solution 3:

True statement  regarding the contribution margin ratio of a single product company is "the contribution margin ratio multiplied by the selling price per unit equals the contribution margin per unit"

Hence option B is correct.