Question 1

When a company experiences an increase in its variable per unit product costs, and no other changes occur, which of the following will happen?

Accepted Answer

When variable costs increase, the contribution margin falls. This results in a higher break-even point.

Question 2

Which of the following is an important difference between a gross margin income statement and a contribution margin income statement?

Accepted Answer

The contribution margin income statement shows details of variable costs and contribution margin to overall profit. It is not intended to be an all- encompassing measure of a company's profitability. However, the contribution margin can be used to examine variable production costs, to evaluate the profitability of an item, and to calculate how to improve its profitability. A gross margin income statement shows the deduction of total product costs, or cost of goods sold, from revenue and does not necessarily show the details of variable costs or the contribution to profit of each additional dollar of sales revenue as does as contribution margin income statement.

Question 3

Which of the following statements regarding gross margin and contribution margin is correct?

Accepted Answer

The essential difference between the contribution margin and gross margin is that fixed overhead costs are not included in the contribution margin. This means that the contribution margin is always higher than the gross margin, if there are no variable period operating expenses. The classic measure of the profitability of goods and services sold as represented on the income statement is gross margin, which is revenues minus the cost of goods sold. Contribution margin is not shown as a line item on the income statement.

Question 4

Which of the following statements regarding gross margin and contribution margin is true?

Accepted Answer

The essential difference between the contribution margin and the gross margin is that the gross margin includes all cost of goods sold items, while the contribution margin does not. The classic measure of the profitability of goods and services sold as represented on the income statement is gross margin, which is equal to revenues minus the cost of goods sold.

Question 5

Corner Cupcakes Co. is selling cupcakes for $10 for a box of one dozen. Corner has fixed costs equaling $108,000 per year, and its accountant has calculated the contribution margin ratio on each box of donuts to be 60% of the selling price. Based on this information, which of the following statements is correct?

Accepted Answer

Break-even is equal to the point at which sales in units multiplied by contribution margin is equal to total fixed costs. If fixed costs equal $108,000 per year, then they equal $9,000 per month (108,000 per year ÷ 12 months). The break-even point is therefore equal to the point at which contribution margin is $9,000 per month. If each box sells for $10 and the contribution margin is 60%, then the contribution margin per box of donuts sold is $6.00 ($10 × 60%). If fixed costs are $9,000 per month and the contribution margin per box is $6.00, then $9,000 ÷ $6.00 = a break-even point of 1,500 boxes per month.

Question 6

Uptown Upholstering Inc. has the following results for the month: Revenues equal $3,500, variable manufacturing costs equal $800, and fixed manufacturing overhead costs equal $900. Which of the following statements is correct?

Accepted Answer

The gross margin equals sales revenues minus variable manufacturing costs less all fixed manufacturing overhead costs. Therefore, gross margin equals $3,500 F1F1F1S1?F1F1F10 $800 F1F1F1S1?F1F1F10 $900 = $1,800

Question 7

As a result of cost increases imposed by its primary supplier, Fast-Fly Fishing Supplies Inc. has experienced an increase in its direct or variable costs per unit that will result in a decrease of 2% in the contribution margin ratio. Operating income last month, before the cost increase, was $2,500 based on sales revenues of $32,000 and fixed costs of $15,500. If sales revenues increase next month by 5%, and the new variable costs come into effect, what can Fast-Fly anticipate in terms of operating profit?

Accepted Answer

Last month, before the variable cost increase, total variable costs were equal to sales revenues of $32,000 minus total fixed costs of $15,500 minus operating profit of $2,500, amounting to $14,000. This means that the contribution margin ratio last month was equal to $18,000 ($32,000 F1F1F1S1?F1F1F10 $14,000) ÷ $32,000, for a total contribution margin ratio of 56.25%. The increase in variable costs will reduce the contribution margin ratio by 2%; therefore, it will drop to 54.25%. If sales revenues increase next month by 5%, this will result in total sales revenues of $32,000 × 1.05 = $33,600. If the contribution margin on this sales revenue is 54.25%, the contribution margin in dollars will be 0.5425 × $33,600 = $18,228. Subtracting fixed costs of $15,500 from this amount will result in operating income of $2,728.

Question 8

Which of the following is an accurate statement regarding gross margin and contribution margin?

Accepted Answer

Cost of goods sold includes both variable and fixed manufacturing costs. Gross margin is calculated by subtracting cost of goods sold from sales. Therefore, gross margin is equal to sales less variable and fixed manufacturing costs.

Question 9

Corner Cupcakes Co. is selling cupcakes for $8 for a box of one dozen. Corner has fixed costs equaling $60,000 per year, and its accountant has calculated the monthly break-even at 1,000 boxes sold. Which of the following statements is correct based on this information?

Accepted Answer

Break-even is equal to the point at which sales in units multiplied by contribution margin equals total fixed costs. If fixed costs equal $60,000 per year, then they equal $5,000 per month ($60,000 ÷ 12 months). If the break-even point is equal to 1,000 boxes per month, then contribution margin is equal to $5,000 ÷ 1,000 = $5 per box. This means that variable costs are equal to the selling price per box of $8 minus the contribution margin of $5, or $3 per box. Therefore, variable costs equal $3 per box, and contribution margin is $5 per unit.

Question 10

The contribution margin income statement will show which of the following calculations?

Accepted Answer

The contribution margin income statement shows contribution margin, not gross margin. Therefore, this statement shows sales revenues minus variable costs.

Question 11

What is the contribution margin (CM) ratio?

Accepted Answer

The contribution margin (CM) ratio is the difference between a company's sales revenues and variable costs, expressed as a percentage of sales revenues.

Question 12

Corner Cupcakes Co. is selling cupcakes for $8 for a box of four. Corner has fixed costs equaling $105,600 per year, and its accountant has calculated the contribution margin ratio on each box of donuts to be 55%. Based on this information, which of the following statements is correct?

Accepted Answer

Break-even is equal to the point at which sales in units multiplied by contribution margin is equal to total fixed costs. If fixed costs equal $105,600 per year, then they equal $8,800 per month ($105,600 ÷ 12 months). The break-even point is therefore the point at which contribution margin is $8,800 per month. If each box sells for $8 and the contribution margin ratio per box is 55%, then the contribution margin per box of donuts sold is $4.40 ($8 × 55%). If fixed costs are $8,800 per month, then $8,800 ÷ $4.40 = a break-even point of 2,000 boxes per month. If 2,200 boxes of donuts are sold in a given month, this will result in a contribution margin of $4.40 × 2,200 boxes = $9,680. This amount minus the monthly fixed costs of $8,800 equals $880 of operating profit for the month.

Question 13

Corner Cupcakes Co. is selling cupcakes for $8 for a box of four. Corner has fixed costs equaling $8,800 per month, and its accountant has calculated the contribution margin ratio on each box of donuts to be 55%. Based on this information, which of the following statements is correct?

Accepted Answer

Break-even is equal to the point at which sales in units multiplied by contribution margin is equal to total fixed costs. If fixed costs are $8,800 per month, and each box sells for $8 with a contribution margin ratio of 55%, then the contribution margin per box of donuts sold is $4.40 ($8 × 55%), and the break-even point is 2,000 boxes per month ($8,800 ÷ $4.40). If fixed costs increase by $1,760 per month, then fixed costs become $10,560 ($8,800 + $1,760), and the break-even point becomes 2,400 boxes ($10,560 ÷ $4.40), representing an increase of 400 boxes of donuts sold.

Question 14

Corner Cupcakes Co. is selling cupcakes for $8 for a box of four. Corner has fixed costs equaling $8,800 per month, and its accounting firm has determined the contribution margin ratio on each box of donuts to be 55%. Corner is currently averaging monthly sales of 2,600 boxes of donuts and the company has a tax rate of 40%. Based on this information, Corner Cupcakes has been averaging monthly net income after taxes of

Accepted Answer

2,600 boxes times $8 per box is equal to $20,800 of sales revenues. If the contribution margin ratio is 55%, the contribution margin in dollars is equal to $20,800 × 55% = $11,440. Subtracting fixed costs of $8,800 gives operating income of $2,640. If the company has a 40% tax rate, then taxes will equal $2,640 × 40% = $1,056. Subtracting the tax amount from operating income will result in net income of $2,640 F1F1F1S1?F1F1F10 $1,056 = $1,584.

Question 15

Hopalong Hot Dog Stand has had the following average results for the past several months: Its selling price per hot dog is $3. Total monthly sales revenues have been $6,000, direct costs of labor and food ingredients have been $2,500 per month, variable indirect costs have been $500 per month, and fixed costs have been $1,500 per month. If Hopalong experiences a $150 per month increase in insurance costs, what will this increase do to its break-even point?

Accepted Answer

Hopalong currently has a contribution margin ratio of 50%. The per-month calculations follow: Contribution margin = $6,000 in sales revenues F1F1F1S1?F1F1F10 $2,500 in direct labor and ingredients costs F1F1F1S1?F1F1F10 $500 in variable indirect costs = $3,000. Contribution margin ratio = $3,000, contribution margin ÷ $6,000, sales revenues = 50% CM ratio. The break-even point before insurance cost increases equals the total fixed costs of $1,500 per month divided by the contribution margin for each hot dog sold, or $3 × 50% = $1.50. Therefore, monthly break-even is $1,500 divided by $1.50, or 1,000 hot dogs. If insurance costs (a fixed cost) increase by $150 per month, this will require the sale of 1,100 hot dogs: $1,650 fixed costs ($1,500 fixed cost + $150 insurance) ÷ $1.50 contribution margin per hot dog, an increase of 100 hot dogs. This can also be calculated by dividing the increased fixed insurance costs of $150 by the $1.50 contribution margin per hot dog.

Question 16

Sammy's Snow Cone Stand has been selling an average of 850 snow cones per week over the first five months of this year. Sammy's sells each cone for $2. Each snow cone incurs variable costs of $0.75, and Sammy's weekly fixed costs are $900. What is the stand's weekly margin of safety in units?

Accepted Answer

Margin of safety is equal to current or forecasted sales level minus break-even point in units sold. Break-even point is calculated by first solving for contribution margin per unit, which is calculated as price per unit minus various cost per unit, then by dividing fixed costs by contribution margin per unit. Thus, contribution margin per snow cone is calculated as $2.00 F1F1F1S1?F1F1F10 $0.75 = $1.25. The weekly break-even point is calculated as $900 per week ÷ $1.25 per cone = 720 snow cones. Since Sammy's has been selling an average of 850 snow cones a week, the margin of safety can be calculated as 850 F1F1F1S1?F1F1F10 720 = 130 snow cones.

Question 17

Which of the following statements regarding margin of safety is correct?

Accepted Answer

The margin of safety can be measured in sales dollars or in units and is the difference between actual, targeted, or projected sales and break-even sales. As break-even declines, margin of safety will increase.

Question 18

The margin of safety is equal to the amount that current or budgeted sales levels exceed which one of the following?

Accepted Answer

The margin of safety is calculated by subtracting break-even sales revenue from current or budgeted sales levels. This calculation shows the amount of sales revenues above the breakeven point, or the total number of sales dollars that can be lost before the company begins to lose money.

Question 19

Iggy's Ice Cream Shop has been selling an average of 500 banana splits per week for the past several months. If Iggy's price per banana split is $4, each split's variable costs are $1, and weekly fixed costs are $1,200, what is Iggy's current margin of safety on banana splits?

Accepted Answer

Margin of safety is current or forecasted unit sales levels minus the break-even point in units sold. Break-even point is equal to total fixed costs divided by contribution margin. Contribution margin is equal to selling price per unit less variable cost per unit, or $4 F1F1F1S1?F1F1F10 $1 = $3. Fixed costs of $1,200 per week divided by the contribution margin of $3 per split is equal to a weekly break-even point of 400 banana splits. Since Iggy's has been selling an average of 500 banana splits a week, the margin of safety can be calculated as 500 F1F1F1S1?F1F1F10 400 = 100.

Question 20

Which of the following statements regarding margin of safety is correct?

Accepted Answer

The margin of safety can be measured in sales dollars or in units and is the difference between actual, targeted, or projected sales and break- even sales.

Quiz 4: Cost-Volume-Profit Analysis

When a company experiences an increase in its variable per unit product costs, and no other changes occur, which of the following will happen?

Which of the following is an important difference between a gross margin income statement and a contribution margin income statement?

Which of the following statements regarding gross margin and contribution margin is correct?

Which of the following statements regarding gross margin and contribution margin is true?

Uptown Upholstering Inc. has the following results for the month: Revenues equal $3,500, variable manufacturing costs equal $800, and fixed manufacturing overhead costs equal $900. Which of the following statements is correct?

Which of the following is an accurate statement regarding gross margin and contribution margin?

Corner Cupcakes Co. is selling cupcakes for $8 for a box of one dozen. Corner has fixed costs equaling $60,000 per year, and its accountant has calculated the monthly break-even at 1,000 boxes sold. Which of the following statements is correct based on this information?

The contribution margin income statement will show which of the following calculations?

What is the contribution margin (CM) ratio?

Corner Cupcakes Co. is selling cupcakes for $8 for a box of four. Corner has fixed costs equaling $105,600 per year, and its accountant has calculated the contribution margin ratio on each box of donuts to be 55%. Based on this information, which of the following statements is correct?

Corner Cupcakes Co. is selling cupcakes for $8 for a box of four. Corner has fixed costs equaling $8,800 per month, and its accountant has calculated the contribution margin ratio on each box of donuts to be 55%. Based on this information, which of the following statements is correct?

Sammy's Snow Cone Stand has been selling an average of 850 snow cones per week over the first five months of this year. Sammy's sells each cone for $2. Each snow cone incurs variable costs of $0.75, and Sammy's weekly fixed costs are $900. What is the stand's weekly margin of safety in units?

Which of the following statements regarding margin of safety is correct?

The margin of safety is equal to the amount that current or budgeted sales levels exceed which one of the following?

Iggy's Ice Cream Shop has been selling an average of 500 banana splits per week for the past several months. If Iggy's price per banana split is $4, each split's variable costs are $1, and weekly fixed costs are $1,200, what is Iggy's current margin of safety on banana splits?

Which of the following statements regarding margin of safety is correct?