Question 1

A 10% change in a firm's revenues is likely to result in a change of more than 10% in the firm's operating income because:

Accepted Answer

Not all of the firm's costs will change in proportion to the revenue change. Some costs may remain fixed, while others may vary with changes in revenue. As a result, a 10% change in revenue is likely to result in a greater than 10% change in operating income. This phenomenon is known as operating leverage.

Question 2

If the selling price per unit were to drop $2, from $100 to $98, the sales volume were to increase 500 units to 4,500 units per month, and advertising expense were to increase by $1,000:

Accepted Answer

The answer of If the selling price per unit were...

Question 3

A firm has revenues of $120,000, a contribution margin ratio of 30%, and fixed expenses that total $56,000. If revenues increase $20,000, then:

Accepted Answer

First, we need to calculate the current contribution margin:

Contribution Margin = Revenue x Contribution Margin Ratio 
Contribution Margin = $120,000 x 0.30 
Contribution Margin = $36,000

Next, we can calculate the current operating income:

Operating Income = Contribution Margin - Fixed Expenses 
Operating Income = $36,000 - $56,000 
Operating Income = -$20,000

This means that the firm is currently operating at a loss.

If revenues increase by $20,000, then the new contribution margin will be:

New Contribution Margin = ($120,000 + $20,000) x 0.30 
New Contribution Margin = $36,000 + $6,000 
New Contribution Margin = $42,000

We can now calculate the new operating income:

New Operating Income = New Contribution Margin - Fixed Expenses 
New Operating Income = $42,000 - $56,000 
New Operating Income = -$14,000

Even though the firm's operating income has improved, it is still operating at a loss. The increase in revenue was not enough to cover the fixed expenses.

Therefore, the correct answer is A) operating income will increase by $6000.

Question 4

ABU Co. has several products, each with a different contribution margin ratio. If the same number of units were sold in July as in June, but the sales mix changed:

Accepted Answer

If the sales mix changes in July, the total contribution margin will be different from June as the different products have different contribution margin ratios. Therefore, the total contribution margin in July would depend on the sales mix and would be different from that in June.

Question 5

ABC Company's sales are $100,000, fixed costs are $50,000, and variable costs are $30,000. ABC Company's contribution margin and operating income are __________ and __________ respectively.

Accepted Answer

The answer of ABC Company's sales are $100,000, fixed costs...

Question 6

Which activity of the management planning and control process occurs in each phase of the cycle?

Accepted Answer

Decision making occurs in each phase of the management planning and control process as it is essential for setting objectives, implementing plans, and evaluating outcomes.

Question 7

The contribution margin format income statement is organized by:

Accepted Answer

The contribution margin format income statement is organized by cost behavior classifications, which separates costs into fixed and variable categories. This format helps management to understand how changes in sales volume will impact their profitability.

Question 8

A management decision that would have a long term influence on the operating leverage of a firm would be:

Accepted Answer

Substituting robots for hourly paid production workers would increase the fixed costs of the firm, which would result in a higher degree of operating leverage. This is because fixed costs are a component of operating leverage, which measures the sensitivity of a firm's earnings before interest and taxes (EBIT) to changes in sales revenue. By increasing fixed costs, the firm would have a higher break-even point, meaning that it would need higher sales revenue to cover its costs and generate profits. This decision would have a long-term influence on the operating leverage of the firm as it would affect its cost structure and financial performance over an extended period.

Question 9

Each of a company's two product lines has a different contribution margin ratio. If the company's total sales remain the same but the sales mix shifts toward selling more of the product with the higher contribution ratio, which of the following is true?

Accepted Answer

If the sales mix shifts towards the product with the higher contribution margin ratio, then the overall average contribution margin ratio will increase. As a result, the company's operating income will also increase. Moreover, the break-even point will decrease because the higher contribution margin ratio means that the company will reach break-even with fewer sales. Therefore, all of the above choices are true.

Question 10

Each of a company's several product lines has a different contribution margin ratio. Total sales in 2017 were 20% higher than total sales in 2016. Total contribution margin for 2017 will be:

Accepted Answer

Since each product line has a different contribution margin ratio, selling more high contribution margin ratio products in 2017 than in 2016 will increase the overall contribution margin. Therefore, if the sales mix changes and proportionately more high contribution margin ratio products are sold in 2017, the total contribution margin for 2017 will be more than 20% higher than it was in 2016.

Question 11

The break-even point in terms of total revenues per month is:

Accepted Answer

The answer of The break-even point in terms of total...

Question 12

A firm's products have an average contribution margin ratio of 40%, which will be maintained for the next month even though fixed expenses are expected to rise by $20,000. In order to keep operating income for the month from being affected, revenues will have to increase by:

Accepted Answer

The answer of A firm's products have an average contribution...

Question 13

Management salaries are an example of a ____________ cost behavior pattern.

Accepted Answer

Management salaries are typically fixed costs because they do not vary with changes in production or sales volume. The amount of salary paid to managers generally stays the same, regardless of whether the company is experiencing high or low levels of activity.

Question 14

ABC Company's sales are $100,000, fixed costs are $50,000, and variable costs are $30,000. ABC Company's contribution margin ratio is:

Accepted Answer

The answer of ABC Company's sales are $100,000, fixed costs...

Question 15

The contribution margin ratio is:

Accepted Answer

The answer of The contribution margin ratio is: 
...

Question 16

If variable costs are 35% of sales and sales increase by $50,000 this month because of a special promotion, by how much will contribution margin increase?

Accepted Answer

If the variable costs are 35% of sales, then the contribution margin is 65% of sales. Therefore, the contribution margin would increase by 65% of $50,000, which is $32,500 (C).

Question 17

Operating income at a volume of 4,000 units per month is:

Accepted Answer

The answer of Operating income at a volume of 4,000...

Question 18

The contribution margin ratio always decreases when the:

Accepted Answer

The contribution margin ratio is calculated by dividing the contribution margin by the sales revenue. The contribution margin is the amount of revenue left after deducting variable expenses from sales revenue. Therefore, if the variable costs increase and the selling price remains constant, the contribution margin will decrease, which will result in a decrease in the contribution margin ratio. Therefore, option D is correct. The other options do not affect the contribution margin ratio in the same way.

Question 19

If sales volume were to decrease 10%, from 4,000 units per month to 3,600 units per month, operating income would:

Accepted Answer

To calculate the impact of a 10% decrease in sales volume on operating income, we need to first determine the current operating income. Without that information, we cannot determine if the operating income will increase, decrease or remain the same.

Let's assume that the current operating income for 4,000 units per month is $240,000. Using this information, we can calculate the operating income for 3,600 units per month as follows:

Operating Income = (Sales Volume x Contribution Margin) - Fixed Costs

Current Operating Income = (4,000 x Contribution Margin) - Fixed Costs = $240,000

To calculate the new operating income for sales volume of 3,600 units, we need to first determine the contribution margin per unit. Let's assume the contribution margin per unit is $60.

New Operating Income = (3,600 x $60) - Fixed Costs

= $216,000 - Fixed Costs

If we assume that the fixed costs remain the same, the new operating income would be:

New Operating Income = $216,000 - $240,000 = -$24,000

As we can see, the operating income would decrease by $24,000 or Choice C).

Question 20

If fixed costs were increased by $9,000 and the contribution margin ratio remained at 30 percent, then sales must increase by _________ in order to cover the additional fixed expenses.

Accepted Answer

The answer of If fixed costs were increased by $9,000...

Quiz 12: Managerial Accounting and Cost-Volume-Profit Relationships