Question 1

Turner Company's contribution margin ratio is 15%. If the degree of operating leverage is 12 at the £150,000 sales level, net operating income at the £150,000 sales level must equal

Accepted Answer

CM ratio = 0.15
Degree of operating leverage = 12
Sales = $150,000
CM ratio = Contribution margin F1F1F1S1F1F1F10 Sales
Contribution margin = CM ratio F1F1F1S1F1F1F10 Sales = 0.15 F1F1F1S1F1F1F10 $150,000 = $22,500
Degree of operating leverage = Contribution margin F1F1F1S1F1F1F10 Net operating income
12 = $22,500 F1F1F1S1F1F1F10 Net operating income
Net operating income = $22,500 F1F1F1S1F1F1F10 12 = $1,875

Question 2

The margin of safety is

Accepted Answer

The margin of safety is the excess of budgeted or actual sales over the break-even volume of sales. It indicates how much sales could decline before the business starts making losses. So option C is correct. Option A is the formula for contribution margin, option B is the formula for the income before taxes, and option D is not related to the margin of safety.

Question 3

The contribution margin ratio is 25% for Grain Company and the break-even point in sales is £200,000. If Grain Company's target net operating income is £60,000, sales would have to be

Accepted Answer

To achieve a target net operating income of £60,000 with a contribution margin ratio of 25%, the required sales can be calculated as follows: Break-even sales + (Target net operating income / Contribution margin ratio) = £200,000 + (£60,000 / 0.25) = £200,000 + £240,000 = £440,000.

Question 4

Incremental analysis is an analytical approach that focuses only on those items of revenue and cost that will change as a result of a decision

Accepted Answer

Incremental analysis considers the effects of changes in variable costs, fixed costs, selling price, and volume on contribution margin.

Question 5

Two companies with identical levels of sales and profits can be expected to have the same margin of safety percentage.

Accepted Answer

The margin of safety percentage represents the amount by which sales can decrease before a company incurs a loss. Two companies with identical levels of sales and profits can still have different levels of fixed costs and variable costs, which would impact their margin of safety percentages. Therefore, it is not safe to assume that they have the same margin of safety percentage.

Question 6

The degree of operating leverage is computed by dividing sales by the contribution margin

Accepted Answer

The degree of operating leverage is computed by dividing the contribution margin by the net operating income.

Question 7

Moon Company sells its product for £6 a unit. Next year, fixed expenses are expected to be £200,000 and variable expenses are estimated at £4 a unit. How many units must Moon sell to generate net operating income of £40,000

Accepted Answer

To calculate the number of units Moon has to sell to earn £40,000 net income, we can use the following formula:

Net Income = (Unit Selling Price x Quantity Sold) - (Variable Costs per Unit x Quantity Sold) - Fixed Costs

£40,000 = (£6 x Q) - (£4 x Q) - £200,000

£40,000 = £2 x Q - £200,000

£240,000 = £2 x Q

Q = 120,000 units

Therefore, Moon Company must sell 120,000 units to generate a net operating income of £40,000.

The correct answer is D, 120,000 units.

Question 8

Southwest Industries produces a sports glove that sells for £15 per pair. Variable expenses are £8 per pair and fixed expenses are £35,000 annually.
The break-even point for Southwest industries is

Accepted Answer

The break-even point is calculated by dividing the total fixed expenses by the contribution margin per unit. The contribution margin per unit is the selling price per unit minus the variable expenses per unit (£15 - £8 = £7). Therefore, the break-even point is £35,000 / £7 = 5,000 pairs.

Question 9

The degree of operating leverage in a company is smallest at the break-even point and increases as sales rise.

Accepted Answer

The degree of operating leverage is highest at the break-even point because at this point, a small change in sales results in a large change in operating income due to the high proportion of fixed costs. As sales increase beyond the break-even point, the degree of operating leverage decreases.

Question 10

Rothe Company manufactures and sells a single product that it sells for £90 per unit and has a contribution margin ratio of 35%. The company's fixed expenses are £46,800. If Rothe desires a monthly target net operating income equal to 15% of sales, sales will have to be (rounded)

Accepted Answer

To find the sales needed to achieve a target net operating income of 15% of sales, we first calculate the required sales using the formula: Sales = Fixed Expenses / (Contribution Margin Ratio - Target Net Income Ratio). Here, Sales = £46,800 / (0.35 - 0.15) = £234,000. Dividing this by the selling price per unit (£90), we get 2,600 units.

Question 11

Assuming no change in the level of fixed expenses, the addition to a company's sales mix of a product with a low contribution margin that increases the total contribution margin could also increase the break-even point expressed in pounds.

Accepted Answer

When a product with a low contribution margin is added to a company's sales mix, it will bring down the overall contribution margin ratio, which will increase the break-even point expressed in pounds. The contribution margin ratio is calculated by dividing the contribution margin by the total sales revenue, and any changes in the sales mix or the contribution margin will have an impact on this ratio. Therefore, computing the CM ratio and using it to analyze changes in contribution margin and profit is a useful tool for decision-making and planning.

Question 12

Last year Easton Company reported sales of £720,000, a contribution margin ratio of 30% and a net loss of £24,000. Based on this information, the break-even point was

Accepted Answer

The break-even point in sales is calculated by dividing the fixed costs by the contribution margin ratio. Since the company reported a net loss of £24,000, this amount represents the fixed costs not covered by the contribution margin. Therefore, the break-even point is (£720,000 * 0.30) + £24,000 = £800,000.

Question 13

Which of the following formulas is used to calculate the contribution margin ratio

Accepted Answer

Contribution margin is the difference between sales and variable expenses, and the contribution margin ratio is calculated by dividing the contribution margin by the sales. Option C represents the correct formula for calculating the contribution margin ratio. Option A represents the formula for calculating the operating income ratio (also known as the profit margin ratio), while option B represents the formula for calculating the gross profit margin ratio. Option D is not a valid formula for calculating the contribution margin ratio.

Question 14

Southwest Industries produces a sports glove that sells for £15 per pair. Variable expenses are £8 per pair and fixed expenses are £35,000 annually.
The contribution margin ratio is closest to

Accepted Answer

Contribution margin ratio = (Selling price per unit - Variable expenses per unit) / Selling price per unit= (£15 - £8) / £15= £7 / £15= 0.4667= 46.67%= 46.7% (rounded to the nearest tenth)

Question 15

The Herald Company manufactures and sells a single product that sells for £50 per unit and has a contribution margin ratio of 30%. The company's monthly fixed expenses are £25,000. If Herald desires a monthly target net operating income equal to 20% of sales pounds, sales in units will have to be (rounded)

Accepted Answer

First, we need to calculate the target net operating income:
£50 × Sales in units × 0.30 (contribution margin ratio) - £25,000 (fixed expenses) = 0.20 (20% of sales pounds) × £50 × Sales in units

Simplifying this equation, we get:
£15 × Sales in units - £25,000 = £10 × Sales in units
£5 × Sales in units = £25,000
Sales in units = 5,000 units.

Question 16

Garth Company sells a single product. If the selling price per unit and the variable expense per unit both increase by 10% and fixed expenses do not change, then

Accepted Answer

If both the selling price and variable expense per unit increase by 10%, then the contribution margin per unit (selling price - variable expense) will increase by 10%. The fixed expenses do not change, so the contribution margin ratio (contribution margin per unit / selling price) will increase as well. With an increase in contribution margin per unit, the break-even point in units (fixed expenses / contribution margin per unit) will decrease. Therefore, the correct answer is D.

Question 17

The variable expense per unit is £12 and the selling price per unit is £40. Then the contribution margin ratio is 70%

Accepted Answer

The contribution margin ratio is calculated as (Selling Price - Variable Expense) / Selling Price. Here, it is (£40 - £12) / £40 = £28 / £40 = 0.70 or 70%.

Question 18

The larger the contribution margin ratio, the smaller the amount of sales required to cover a given amount of fixed expenses.

Accepted Answer

The statement is true. The contribution margin ratio indicates the percentage of sales revenue that contributes towards covering fixed expenses. A higher contribution margin ratio means that the company can cover its fixed expenses with fewer sales, leading to a higher profitability. By computing changes in the CM ratio, one can analyze the impact of changes in sales mix or selling prices on the contribution margin and profit.

Question 19

On a CVP graph for a profitable company, the total revenue line will be steeper than the total expense line.

Accepted Answer

A CVP graph displays the relationship between a company's revenue, expenses, and profit at different levels of sales volume. The total revenue line represents the sales revenue generated by the company and is typically a straight line that starts at the origin and slopes upward. The slope of the total revenue line is determined by the selling price per unit and the number of units sold. The total expense line represents the costs incurred by the company, including fixed costs and variable costs. The total expense line usually starts at a point above the origin, indicating that the company incurs fixed costs even when it produces and sells no units. The slope of the total expense line is determined by the variable cost per unit and the fixed costs. The break-even point is where the total revenue line intersects the total expense line, indicating the point where the company has neither a profit nor a loss. Beyond the break-even point, the company begins to generate a profit, and the distance between the total revenue and total expense lines represents the profit margin. The CVP graph is a useful tool that can help companies make pricing and production decisions and evaluate their financial performance.

Question 20

The contribution margin ratio is 30% for the Honeyville Company and the break-even point in sales is £150,000. If the company's target net operating income is £60,000, sales would have to be

Accepted Answer

The formula to calculate the break-even point in sales is:

Break-even point = Fixed costs / Contribution margin ratio

Using the information given in the question, we can calculate the fixed costs:

Break-even point = £150,000
Contribution margin ratio = 30%

£150,000 = Fixed costs / 30%
Fixed costs = £150,000 x 30% = £45,000

Now that we know the fixed costs, we can use the formula to calculate the required sales to achieve the target net operating income of £60,000:

Target net operating income = (Sales - Variable costs) - Fixed costs
£60,000 = (Sales x Contribution margin ratio) - £45,000

Solving for Sales, we get:

£60,000 + £45,000 = Sales x 30%
£105,000 = Sales x 30%
Sales = £105,000 / 30%
Sales = £350,000

Therefore, the answer is B) £350,000.

Quiz 7: Job Costing Systems