B. if the fixed cost increased, would the new break-even point be higher or lower?

5–1What is the meaning of contribution margin ratio? How is this ratio useful in planning business

operations?

contribution margin is the difference between a company's sales and variable expenses, expressed as a

percentage. This ratio is useful in business planning because marginal contributions cover fixed

expenses. As a result, businesses with high profit margins are more likely to pay fixed fees than those

with lower margins. This helps with planning and expansion, adding new product lines.

5–2Often the most direct route to a business decision is an incremental analysis. What is meant by an

incremental analysis?

A decision-making technique used in business to determine the true cost difference between

alternatives. Incremental analysis ignores sunk costs and the same costs between the two options,

focusing only on residual costs. Therefore, it is also called correlation costing, margin analysis, or

difference analysis

5–3In all respects, Company A and Company B are identical except that Company A’s costs are

mostly variable, whereas Company B’s costs are mostly fixed. When sales increase, which company

will tend to realize the greatest increase in profits? Explain.

When sales increase, company B's fixed costs increase the most and its profits increase the most,

because with fixed costs unchanged, the profit margin is larger. A firm based on variable costs spends

more on unit costs than a firm based on fixed costs.

5–4What is the meaning of operating leverage?

Operating leverage is a measure of the sensitivity of net operating income to percentage changes in

dollar sales. Operating leverage acts as a multiplier. If operating leverage is high, a small percentage

increase in sales can generate a much larger percentage increase in net operating income.

5–5What is the meaning of break-even point?

The break-even point is the level of sales at which profit is zero. Once the break-even point is

reached, net operating income will increase by the number of units contributing to the difference

between units sold.

5–6In response to a request from your immediate supervisor, you have prepared a CVP graph

portraying the cost and revenue characteristics of your company’s product and operations. Explain

how the lines on the graph and the break-even point would change if (a) the selling price per unit

decreased, (b) fixed cost increased throughout the entire range of activity portrayed on the graph, and

(c) variable cost per unit increased.

a. the total revenue line will be less steep if the selling price per unit decreased. Also, if the selling

price per unit decreased, more units would have to be sold, making the break—even point at a higher

unit of volume.

b. the fixed line and the total cost line would shift upwards if fixed costs increased. It will make the

break—even point at a higher unit of volume.

c. the total cost line will be steeper if the variable cost increases. It will make the break—even point at

a higher unit of volume.

5–7What is the meaning of margin of safety?

What happens to the break

What happens to break

What does it mean when the break