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Free CMA Exam Braindumps (page: 76)

Page 76 of 336
PDF with 1336 Questions
View Related Case Study

The margin of safety is a key concept of CVP analysis. The margin of safety is the

  1. Contribution margin rate.
  2. Difference between budgeted contribution margin and Break even contribution margin.
  3. Difference between budgeted sales and breakeven sales.
  4. Difference between the breakeven point in sales and cash flow breakeven.

Answer(s): C

Explanation:

The margin of safety measures the amount by which sales may decline before losses occur. It is1 the excess of budgeted or actual sales over sales at the BEP. It may be stated in either units sold or sales revenue.



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When used in cost-volume-profit analysis, sensitivity! Analysis

  1. Determines the most profitable mix of products to be sold.
  2. Allows the decision maker to introduce probabilities in the evaluation of decision alternatives.
  3. Is done through various possible scenarios and computes the impact on profit of various predictions of future events.
  4. Is limited because, in cost-volume-profit analysis, costs are not separated into fixed and variable components.

Answer(s): C

Explanation:

Sensitive analysis permits the decision maker to measure the effects of errors in certainty equivalents, which are estimated amounts developed by the best means available and assumed for purposes of a given decision model to be certain. The decision model then may be evaluated by changing certain data variables (certainty equivalents) critical to the success of the entity and observing the outcomes. This analysis allows the decision maker to quantify the effects of forecasting or prediction errors and to identify the most critical variables. For example, with respect to breakeven analysis, a firm might make computations using several different estimates of what fixed costs are expected to be. These calculations indicate how sensitive the results are to changes in fixed costs.



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Which of the following would decrease unit contribution margin the most?

  1. A 15% decrease in selling price.
  2. A 15% increase invariable expenses.
  3. A 15% decrease in variable expenses.
  4. A 15% decrease in fixed expenses.

Answer(s): A

Explanation:

The plausible options are a decrease in selling price or an increase in variable expenses because UCM equals unit sales price minus unit variable cost. However, a given percentage change in unit sales price must have a greater effect than an equal but opposite percentage change in unit variable cost because the former is greater than the latter. The example below demonstrates this point.



View Related Case Study

Marston Enterprises sells three chemicals: petrol, septine, and tridol. Petrol is the company's most profitable product tridol is the least profitable. Which one of the following events will definitely decrease the firm's overall breakeven point for the upcoming accounting period?

  1. The installation of new computer-controlled machinery and subsequent layoff of assembly-line workers.
  2. A decrease in tridol's selling price.
  3. An increase in the overall market for septine.
  4. An increase in anticipated sales of petrol relative to sales of septine and tridol.

Answer(s): D

Explanation:

A company's breakeven point will be reduced if fixed costs are lowered or the average unit contribution margin is increased. Given that petrol is the company's most profitable product, and assuming that it has a higher unit contribution margin than septine and tridol, an increase in sales of petrol relative to the other products will result in a higher average unit contribution margin and a lower breakeven point (fixed costs ÷ average UCM).



Page 76 of 336



Post your Comments and Discuss Financial CMA exam with other Community members:

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INDIA
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Anonymous
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Georgodino commented on April 29, 2021
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ARGENTINA
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Anonymous
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emad hamdy commented on May 03, 2019
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UNITED STATES
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Amer Alnajjar commented on March 11, 2019
Still the test is under process
Anonymous
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Anonymous
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