3 4 apply the cvp model in decision making and explain how sensitivity analysis can 4302582

 

3.4   Apply the CVP model in decision making and explain how sensitivity analysis can help managers both identify and manage risk.

 

1) Sensitivity analysis may be used to determine how a result will change if the original data are changed or if the original results are not achieved.

 

2) Margin of safety measures the difference between budgeted revenues and break-even revenues.

 

3) Sensitivity analysis is a “what-if” technique that managers use to examine how a result will change if the originally predicted data are not achieved or if an underlying assumption changes.

4) A probability distribution describes the likelihood of each of the mutually exclusive and collectively exhaustive set of events.

 

5) An expected value is the weighted-average of the outcomes based on the percentage combinations of the incomes.

 

6) Companies with a greater proportion of fixed costs have a greater risk of loss from changes in demand than companies with a greater proportion of variable costs.

 

7) The degree of operating leverage at a specific level of sales helps the managers calculate the effect that potential changes in sales will have on operating income.

 

8) “Uncertainty” may be defined as

A) the possibility that an actual amount will be the same as an expected amount.

B) the possibility that an actual amount will be either higher or lower than the expected amount.

C) the possibility that a budgeted amount will be the same as an estimated amount.

D) the possibility that the budgeted amount will be lower than the estimated amount.

E) the possibility that the budgeted amount will be either higher or lower than the expected amount.

 

9) Which of the following statements about sensitivity analysis is true?

A) It is a technique which is used to examine past results.

B) It can be used in CVP to show changes in operating income if variable costs per unit change.

C) It examines the relationship between production and service departments.

D) It shows the impact of a manager's behaviour.

E) It is relevant for isolating conversion costs.

10) Chris Muss is going to sell Ad-hoc compact disks for $40 a box; one box is considered to be one unit. The disks cost Chris $10 a unit. She is planning to rent a booth at the up-coming Area Computer Show. She has three options for attending the show:

 

1.paying a fixed fee of $3,000;

2.paying a $1,000 fee plus 10% of her revenue made at the convention, or;

3.paying 25% of her revenue made at the convention.

Which of the following statements is true?

A) CVP analysis can show that the risks are identical in each case.

B) The break-even point is the identical in each case.

C) One of the options will allow Chris Muss to break-even, even if she doesn't sell any disks, assuming she can return any unsold disks for a full refund.

D) Fixed costs are inherent in all of the options.

E) Operating income per unit is the same in each case, as both selling price and costs are the same.