Questions:
1. What is the variable cost ratio? The contribution margin ratio? How are the two ratios related?
2. If the contribution margin increases from 30 to 35 percent of sales, what will happen to the break-even point, and why will this occur?
3. Suppose a firm with a contribution margin ratio of 0.3 increased its advertising expenses by $10,000 and found that sales increased by $30,000. Was it a good decision to increase advertising expenses? Why is this simple problem an important one for business people to understand?
4. Define the term sales mix, and give an example to support your definition.
5. Explain how CVP analysis developed for single products can be used in a multiple-product setting.