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Business

Accounting

The margin of safety is the amount that sales can drop before the company incurs a loss True False

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter3: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 4Q: In a cost-volume-profit analysis, explain what happens at the break-even point and why companies do...

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In a cost-volume-profit analysis, explain what happens at the break-even point and why companies do not want to remain at the break-even point.
The margin of safety can be defined as the amount by which sales can decrease beforelosses are incurred by the company.TRUEFALSE
the margin of safety is the reduction in sales that can occur before the break-even point is reached. It measures the cushion that a particular level of sales can decline without incurring a loss. Discuss two limitations of relying on a margin of safety when predicting future sales. Is it reliable? Why or why not? Provide support for rationale.
Explain why a segment with an operating loss can cause the company to have a decrease in total operating income if the segment is dropped.
The amount by which a company's sales can decline before losses are incurred is called the:degree of operating leverage.margin of safety.profit loss.contribution margin ratio.
true or false The smaller the contribution margin ratio, the larger the amount of sales required to cover a given amount of fixed expenses True False The margin of safety can be defined as the amount by which profit can decrease before losses are incurred by the company True False A big increase in sales will result in a small increase in profit if there is a low degree of operating leverage in a company True False
gross profit margin (gross profit/sales) is an important determinant of NOPAT. identify two factors that can cause gross profit margin to decline. is a a reduction in the gross profit margin always bad news? Explain.
A company's break-even point will not be changed by: a change in the selling price per unit. a change in the income tax rate. a change in the variable cost per unit. a change in total fixed costs.
Explain how a shift in the sales mix could result in both a higher break-even point and a lower net operating income.
Explain two possible risks to a company that makes losses regularly?
One drawback to the weighted average method is that you might end up selling products at a loss True or false?
Break-Even Point AnalysisThe break-even point is usually expressed as the amount of revenue that must berealized for the firm (or product or activity or group of products or activities) to haveneither profit nor loss (that is, operating income equal to zero). The break-even pointis useful to managers because it expresses a minimum revenue target, and managersfrequently find it easier to think in terms of revenues rather than variable and fixedexpenses. In addition, the amount of sales (or revenues) generated by the firm is easilydetermined daily from the accounting system.The contribution margin model is used to determine the break-even point by setting operating income equal to zero and solving the model for the revenue or physicalsales volume that will cause that result. The calculation of break-even point in termsof units and total revenues is illustrated here:Selling price per unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .…