Instructions: Designate whether each of the following statements dealing with th
ID: 2496716 • Letter: I
Question
Instructions: Designate whether each of the following statements dealing with the process cost accounts and cost-volume-profit relationship is true (T) or false (F).
T or F A contribution format income statement classifies costs by function, but a traditional income statement classifies costs by cost behavior (variable or fixed).
T or F A company’s break-even point can be decreased by increasing the contribution margin ratio.
T or F At the break-even point, total contribution margin is equal to total fixed costs.
Explanation / Answer
A contribution format income statement classifies costs by function, but a traditional income statement classifies costs by cost behavior (variable or fixed) : False.
A company’s break-even point can be decreased by increasing the contribution margin ratio : True
Reason : Break- even point can be calculated by the formula :
Total Fixed Cost / Contribution margin per unit. Hence, if the Contribution margin per unit is increased the Break- even point will be decreased.There is inverse relation between break even point and contribution margin.
At the break-even point, total contribution margin is equal to total fixed costs : True
Reason : At the break even point, Total revenue equals total cost
Hence, At the break even point,
Sales= Fixed Cost + Variable Cost
or Sales- Variable Cost = Fixed Cost
or Contribution Margin = Fixed Cost.