Multiple Choice
Which of the following is NOT a common cost flow assumption used in costing inventory under either the perpetual or periodic inventory systems?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
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Which of the following statements about cost-volume-profit (CVP) analysis and breakeven calculation is TRUE?
A
Breakeven in units is calculated by dividing total sales by the variable cost per unit.
B
Breakeven in dollars is calculated by dividing total variable costs by the contribution margin ratio.
C
Breakeven in units is calculated by dividing total fixed costs by the contribution margin per unit.
D
CVP analysis cannot be used to determine the breakeven point in dollars.
Verified step by step guidance1
Step 1: Understand the concept of Cost-Volume-Profit (CVP) analysis. CVP analysis is a method used to understand the relationship between costs, sales volume, and profit. It helps businesses determine the breakeven point, which is the level of sales at which total revenue equals total costs, resulting in zero profit.
Step 2: Review the formula for breakeven in units. The breakeven point in units is calculated using the formula: \( \text{Breakeven in Units} = \frac{\text{Total Fixed Costs}}{\text{Contribution Margin per Unit}} \). The contribution margin per unit is calculated as \( \text{Selling Price per Unit} - \text{Variable Cost per Unit} \).
Step 3: Review the formula for breakeven in dollars. The breakeven point in dollars is calculated using the formula: \( \text{Breakeven in Dollars} = \frac{\text{Total Fixed Costs}}{\text{Contribution Margin Ratio}} \). The contribution margin ratio is calculated as \( \frac{\text{Contribution Margin per Unit}}{\text{Selling Price per Unit}} \).
Step 4: Analyze the statements provided in the problem. The first statement is incorrect because breakeven in units is not calculated by dividing total sales by the variable cost per unit. The second statement is incorrect because breakeven in dollars is not calculated by dividing total variable costs by the contribution margin ratio. The third statement is correct because breakeven in units is indeed calculated by dividing total fixed costs by the contribution margin per unit. The fourth statement is incorrect because CVP analysis can be used to determine the breakeven point in dollars.
Step 5: Conclude that the correct answer is the third statement: 'Breakeven in units is calculated by dividing total fixed costs by the contribution margin per unit.' This aligns with the standard formulas used in CVP analysis.
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