5-1                          What is meant by a product’s contribution margin ratio? How is this ratio useful in planning business operations?

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

An incremental analysis focuses on the change in revenue, cost, and volume that will result from a particular action.

5-3                          In 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.

5-4                          What is meant by the term operating leverage?

5-5                          What is meant by the term break-even point?

5-6                          In 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.

5-7                          What is meant by the margin of safety?

5-8                          What is meant by the term sales mix? What assumption is usually made concerning sales mix in CVP analysis?

5-9                          Explain how a shift in the sales mix could result in both a higher break-even point and a lower net income.