Question

1. A differential cost is a variable cost

True

False.

2. If the number of units sold increase, the break-even point will decrease.

True

False.

3. All other things the same, a decrease in variable expenses per unit will reduce the break-even point.

True

False.

4. Inventories are usually the most liquid, but lowest-yielding, current asset of a firm.

True

False.

5. A sunk cost is a cost that has already been incurred but that can be avoided at least in part depending on the action a manager takes.

True

False.

6. At the break-even point, variable expenses and fixed expenses are equal.

True

False.

7. The costs of carrying inventory include all of the following except: *

a- Ordering costs.

b- Cost of warehouse space.

c- Insurance and handling costs.

d- Interest on funds tied up in inventory.

e- None of the above.

8. Once the break-even point is reached: *

a- The contribution margin ratio begins to decrease.

b- The variable expenses will remain constant in total.

c- The total contribution margin changes from negative to positive.

d- The net operating income will increase by the unit contribution margin for each additional item sold.

e- None of the above.

9. Allocated common fixed costs: *

a- Are always incremental costs.

b- Can make a product line appear to be unprofitable.

c- Are always relevant in decisions involving dropping a product line.

d- All of the above.

e- None of the above.

10. If Company C has a higher degree of operating leverage than Company D, then: *

a- Company C is less risky.

b- Company C is more profitable.

c- Company C has higher variable expenses.

d- Company C’s profits are more sensitive to percentage changes in sales.

e- None of the above.

Answer 1

1.

True

A differential cost can be a variable cost, a fixed cost, or a mix of the two – there is no differentiation between these types of costs, since the emphasis is on the gross difference between the costs of the alternatives or change in output.

2.

True

If Selling Price is the only parameter increasing, it will increase Contribution Margin per unit. This will bring break even point lower, as the lesser number of units sold will fetch the same amount of Fixed Costs.

3.

True

All other things the same, a decrease in variable expenses per unit will reduce the break-even point.

4.

False

The given statement is incorrect.

5.

False

A sunk cost is a cost that has already been incurred and cannot be avoided at least in part depending on the action a manager takes.

6.

False

It break even point, the contribution margin and fixed expenses are equal