Break-even Point (Quiz)

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  1. 1.

    Fixed Expenses do not change in total when there is a modest change in sales.

    True
    Right!
    The total of a fixed expense is indeed fixed (does not change) as the volume increases or decreases by a reasonable amount.
    False
    Wrong.
    The total of a fixed expense is indeed fixed (does not change) as the volume increases or decreases by a reasonable amount.
  2. 2.

    An example of a fixed expense would be a 5% sales commission.

    True
    Wrong.
    A 5% sales commission is an example of a variable expense.
    False
    Right!
    The answer is false because a 5% sales commission is an example of a variable expense.
  3. 3.

    Property taxes and rent are often fixed expenses.

    True
    Right!
    Property taxes do not vary with sales. Rather they are fixed, because they are based upon an assessed value of the property. Rent is generally based on the value of property and competitive rates per square foot. Hence rent usually will not vary with sales. (An exception would be a retail mall where it is agreed that rent will be based on sales.)
    False
    Wrong.
    Generally property taxes and rents are fixed. They are usually based on the value of the property and do not vary with the company's sales.
  4. 4.

    Variable expenses change in total as volume changes.

    True
    Right!
    Variable expenses will increase in total as volume increases and variable expenses will decrease in total as volume decreases.
    False
    Wrong.
    Variable expenses will increase in total as volume increases and variable expenses will decrease in total as volume decreases.
  5. 5.

    An example of a variable expense is an office manager's monthly salary.

    True
    Wrong.
    Usually an office manager's salary is fixed in total. The salary is unlikely to decrease in the months when the sales volume decreases or to increase in the months when the sales volume increases.
    False
    Right!
    The answer is false because an office manager's salary is not likely to change in total as sales volume changes.
  6. 6.

    A retailer's cost of goods sold is an example of a variable expense.

    True
    Right!
    If a retailer sells more units of goods, sales revenue increases and the cost of goods sold also increases. When fewer units of goods are sold, sales revenue decreases and the cost of goods sold decreases.
    False
    Wrong.
    The correct answer is 'True' because a retailer's cost of goods sold will increase in total as sales increase. Cost of goods sold will decrease in total when sales decrease.
  7. 7.

    Contribution margin is defined as sales (or revenues) minus variable expenses.

    True
    Right!
    This is the correct answer.
    False
    Wrong.
    The correct answer is 'True.'
  8. 8.

    Break-even point is the point where revenues equal the total of all expenses including the cost of goods sold.

    True
    Right!
    If revenues minus all expenses (fixed and variable, and including cost of goods sold) equals zero, you are at the break-even point.
    False
    Wrong.
    If revenues minus all expenses (fixed and variable, and including cost of goods sold) equals zero, you are at the break-even point.
  9. 9.

    The break-even point in dollars of revenues is equal to the total of the fixed expenses divided by the contribution margin per unit.

    True
    Wrong.
    Fixed expenses divided by the contribution margin per unit is the break-even point in UNITS (not the break-even point in dollars).
    False
    Right!
    Fixed expenses divided by the contribution margin per unit is the break-even point in UNITS (not the break-even point in dollars).
  10. 10.

    If a company requires a profit of $30,000 (instead of breaking even), the $30,000 should be combined with the fixed expenses in order to compute the point at which the company will earn $30,000.

    True
    Right!
    False
    Wrong.
    It is true that the required profit should be added to the fixed expenses to calculate the sales point (in units or dollars) necessary to earn a profit of $30,000.
  11. 11.

    If a company has mixed expenses, the fixed component can be combined with the company's fixed expenses and the variable component can be combined with the company's variable expenses.

    True
    Right!
    False
    Wrong.
  12. 12.

    Decreasing a company's fixed expenses should reduce the break-even point.

    True
    Right!
    False
    Wrong.
  13. 13.

    The contribution margin per unit is the selling price per unit minus the fixed expenses per unit.

    True
    Wrong.
    The contribution margin is selling price per unit minus VARIABLE expenses per unit.
    False
    Right!
    The contribution margin is selling price per unit minus VARIABLE expenses per unit.
  14. 14.

    Break-even analysis is useful for companies that sell products, but it is not useful for companies that provide services.

    True
    Wrong.
    Break-even analysis is useful for service companies as well as companies that sell products.
    False
    Right!
  15. Use this information to answer questions 15 through 17:

  16. 15.

    What is the company's contribution margin?

    $10
    Right!
    $13
    Wrong.
    Contribution margin per unit is $10: Selling Price per unit of $17 minus Variable Expenses per unit of $7.
    $14
    Wrong.
    Contribution margin per unit is $10: Selling Price per unit of $17 minus Variable Expenses per unit of $7.
  17. 16.

    What is the break-even point in units?

    10,000
    Wrong.
    The break-even point is 14,000 units: Fixed Expenses of $140,000 divided by the Contribution Margin per unit of $10.
    14,000
    Right!
    20,000
    Wrong.
    The break-even point is 14,000 units: Fixed Expenses of $140,000 divided by the Contribution Margin per unit of $10.
  18. 17.

    If the company wants to earn a profit of $42,000 instead of breaking even, what is the number of units the company must sell?

    14,000
    Wrong.
    The number of units that will generate a profit of $42,000 is 18,200 units: Fixed Expenses of $140,000 + Desired Profit of $42,000 = $182,000 divided by the Contribution Margin per unit of $10.
    18,200
    Right!
    26,000
    Wrong.
    The number of units that will generate a profit of $42,000 is 18,200 units: Fixed Expenses of $140,000 + Desired Profit of $42,000 = $182,000 divided by the Contribution Margin per unit of $10.
  19. Use this information to answer questions 18 through 20:

  20. 18.

    What is the company's contribution margin ratio?

    30%
    Right!
    The contribution margin is sales minus variable expenses. The contribution margin ratio is the contribution margin expressed as a percentage of sales or revenues. In this question the variable expenses are 70% (58%+7%+5%) of sales. That means the contribution margin ratio is 30%.
    70%
    Wrong.
    70% is the variable expenses as a percentage of sales. The contribution margin ratio is the remainder of sales minus variable expenses, expressed as a percentage of sales. In this case the contribution margin ratio is 30%.
    Cannot Be Determined
    Wrong.
    The contribution margin is sales minus variable expenses. The contribution margin ratio is the contribution margin expressed as a percentage of sales or revenues. In this question the variable expenses are 70% (58%+7%+5%) of sales. That means the contribution margin ratio is 30%.
  21. 19.

    What is the break-even point in dollars?

    $77,000
    Wrong.
    The fixed expenses are $77,000 and the contribution margin ratio is 30% (Sales minus variable costs of 70%.) Therefore, the break-even point in dollars = $77,000 divided by 30%.
    $110,000
    Wrong.
    The break-even point is fixed expenses divided by the contribution margin. In this case the contribution margin ratio is 30%.
    $256,667
    Right!
    Fixed expenses of $77,000 divided by the contribution margin ratio of 30% = $256,667.
  22. 20.

    If the company wants to earn a profit of $35,000 instead of breaking even, what is the amount of sales or revenue dollars the company must achieve?

    $112,000
    Wrong.
    $112,000 is the total of $77,000 of fixed expenses plus the required profit of $35,000. This $112,000 will be covered by the contribution margin of 30% of sales. That means the sales must be significantly greater than $112,000.
    $145,000
    Wrong.
    $112,000 is the total of $77,000 of fixed expenses plus the required profit of $35,000. This $112,000 will be covered by the contribution margin of 30% of sales. That means the sales must be significantly greater than $145,000.
    $373,333
    Right!
    $112,000 (the total of the fixed expenses plus the desired profit) gets divided by the contribution margin of 30% to arrive at the required sales of $373,333.

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