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# Variable cost / absorption cost/ break even

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1. If the variable expense per unit increases and all other factors remain constant, the contribution margin ratio will increase.
TRUE / FALSE

2 An increase in total fixed expenses will not affect the break-even point so long as the contribution margin ratio remains unchanged.
TRUE / FALSE
3 All other things the same, a reduction in the variable expense per unit will cause the break-even point to rise.

TRUE / FALSE
4 The formula for the break-even point is the same as the formula to attain a given target profit for the special case where the target profit is zero.

TRUE / FALSE

5 A shift in the sales mix from products with high contribution margin ratios toward products with low contribution margin ratios will raise the break-even point.
TRUE / FALSE

6. The margin of safety in dollars equals the excess of budgeted (or actual) sales over the break-even volume of sales.
TRUE / FALSE

7. 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.
TRUE / FALSE

#### Solution Preview

1. If the variable expense per unit increases and all other factors remain constant, the contribution margin ratio will increase.
FALSE

The contribution margin will decline as variable costs are increasing. The formulae of Contribution margin Ratio = (Sales -Variable cost)/Sales

2 An increase in total fixed expenses will not affect the ...

#### Solution Summary

Response discusses the Variable cost / absorption cost/ break even

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## Absorption and Variable costing, CVP Analysis, break even

Brownstone Company began operations on January 1 to produce a single product. It used a standard absorption costing system with a planned production volume of 100,000 units. During its first year of operations, no variances were incurred and there were no fixed selling or administrative expenses. Inventory on December 31 was 20,000 units, and net income for the year was \$240,000.

1. If Brownstone had used variable costing, its net income would have been \$220,000. Compute the break even point in units under variable costing.
2. Draw a profit-volume graph for Brownston Company (using variable costing).

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