f a firm has a mixed cost function, a 10% increase in sales volume should increase income by more than 10%. Explain why.
3.2 Explain how to calculate a weighted average contribution margin per unit.
3.3 An organization experiences a 20% increase in pretax profits when revenues increase 20%. Assuming linearity, what do
you know about the organization’s cost function?
3.4 What is the effect on a firm’s breakeven point of a lower income tax rate?
3.5 To estimate revenues, costs, and profits across a range of activity, we usually assume that the cost and revenue functions
are linear. What are the specific underlying assumptions for linear cost and revenue functions, and how reasonable are
these assumptions?
3.6 Explain the relationship between margin of safety percentage and degree of operating leverage.
How do volume discounts from suppliers affect our assumption that the cost function is linear? Explain how we
incorporate this type of cost into a CVP analysis.
3.8 Explain the term sales mix in your own words. How does sales mix affect the contribution margin?
3.9 How are CVP analysis and breakeven analysis related?
3.10 Can the margin of safety ever be negative? Explain your answer.
3.11 Describe three uses for CVP analysis.
3.12 Explain how CVP analysis can be used to make decisions about increases in advertising costs.
3.13 Under what circumstances will managers want sensitivity analysis around results from a CVP analysis?
3.14 Explain how the optimism bias affects the use of CVP analysis. Be very specific in your answer, listing the types of cash
flows that are apt to be overestimated or underestimated.
3.15 Suppose average costs were used in a CVP analysis instead of fixed costs and variable costs. Explain the circumstances in
which costs would be overestimated or underestimated
