Select the incorrect statement regarding cost-volume-profit relationships for mu
ID: 2508168 • Letter: S
Question
Select the incorrect statement regarding cost-volume-profit relationships for multiple products.
For a company that sells many different products, the level of the break-even point is affected by the company's sales mix.
An increase in sales volume accompanied by a change in sales mix could cause a company's profits to decrease.
For a multi-product company, cost-volume-profit analysis can be done using the contribution margin ratio of the most profitable product.
None of these answers is correct.
Which of the following statements regarding cost-volume-profit analysis is incorrect?
Cost-volume-profit analysis assumes that fixed cost per unit is constant.
Cost-volume-profit analysis assumes that the selling price cost per unit is constant.
An increase in inventory during a period will affect cost-volume-profit relationships.
Although cost-volume-profit analysis is based on assumptions that seldom will be perfectly achieved, the technique is still useful to managers.
Martinez Company sells one product that has a sales price of $20 per unit, variable costs of $8 per unit, and total fixed costs of $200,000, what is the contribution margin ratio?
40%
60%
50%
66%
Select the correct statement regarding the contribution margin ratio.
The contribution margin ratio can be calculated using either total amounts or per unit amounts.
The contribution margin ratio equals contribution margin per unit divided by variable cost per unit.
Total fixed costs divided by the contribution margin ratio equals the break-even point in units.
An increase in variable cost per unit will cause the contribution margin ratio to increase.
Explanation / Answer
1. Select the incorrect statement regarding cost-volume-profit relationships for multi products.
For a multi-product company, cost-volume-profit analysis can be done using the contribution margin ratio of the most profitable product.
Rationale: A company which is involved in multi products, will have a different contribution margin from each of its product due to the different different selling price and its associated variable cost, hence cost-volume-profit analysis to be done separately for each of its product and it can not be done using the contribution margin ratio of the most profitable product.
2. Which of the following statements regarding cost-volume-profit analysis is incorrect?
Cost-volume-profit analysis assumes that fixed cost per unit is constant.
Rationale: Total fixed cost as a whole will be constant but foxed cost per unit can not be constant as per unit fixed cost will keep increasing/decreasing basis the number of units produced and sold keeps decreasing/increasing.
Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income. In performing this analysis, there are several assumptions made, including:
a. Sales price per unit is constant.
b. Variable costs per unit are constant.
c. Total fixed costs are constant.
d. Everything produced is sold.
e. Costs are only affected because activity changes.
f. If a company sells more than one product, they are sold in the same mix.
3. Martinez Company sells one product that has a sales price of $20 per unit, variable costs of $8 per unit, and total fixed costs of $200,000, what is the contribution margin ratio?
Answer is 60% as calculated below.
Contribution margin ratio = (Contribution per unit /Sales price per unit) *100
Contribution per unit = Sales price per unit - Variable cost per unit
= $20 - $8
= $12 per unit
Therefore, contribution margin ratio = ($12/$20) * 100
= 60%
4. Select the correct statement regarding the contribution margin ratio.
The contribution margin ratio can be calculated using either total amounts or per unit amounts.
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