Question 1

When using the contribution margin ratio, managers project operating income based upon sales units.

Accepted Answer

The contribution margin ratio is used to project operating income based on sales dollars, not units. It measures the percentage of each sales dollar that contributes to covering fixed costs and generating profit.

Question 2

Which of the following represents the excess of the selling price per unit of a product over the variable cost of obtaining and selling each unit?

Accepted Answer

The excess of the selling price per unit of a product over the variable cost of obtaining and selling each unit is known as the unit contribution margin. Gross margin is the excess of revenue over the cost of goods sold, operating income is the excess of revenue over all operating expenses, and net income is the final profit after deducting all expenses from revenue, including taxes and interest.

Question 3

The contribution margin ratio explains the percentage of each sales dollar that

Accepted Answer

The contribution margin ratio indicates the portion of each sales dollar that goes beyond covering variable costs and contributes towards covering fixed costs and generating a profit.

Question 4

Total contribution margin less total fixed expenses equals

Accepted Answer

The formula for calculating operating income is Total Contribution Margin - Total Fixed Expenses. Therefore, the correct choice is B.

Question 5

CVP analysis assumes that the only factor that affects costs is a change in sale price.

Accepted Answer

CVP analysis examines the relationship between revenue, cost, and volume of products sold. It assumes that costs can be divided into fixed and variable components and that changes in volume (i.e. sales) are the primary driver of changes in total costs. Therefore, changes in sale price are not the only factor that affect costs in CVP analysis. Other factors such as changes in variable costs, fixed costs, or the sales mix can also impact costs and profits.

Question 6

Contribution margin on an income statement is equal to sales revenue minus fixed expenses.

Accepted Answer

Contribution margin on an income statement is equal to sales revenue minus variable expenses, not fixed expenses.

Question 7

Contribution margin ratio is computed by

Accepted Answer

Contribution margin ratio is calculated by dividing the contribution margin (sales revenue minus variable costs) by sales revenue. This ratio represents the percentage of sales revenue that is available to cover fixed costs and provide profits.

Question 8

A product's contribution margin per unit is the excess of the selling price per unit over the variable cost of obtaining and selling each unit.

Accepted Answer

This statement correctly defines the contribution margin per unit.

Question 9

CVP analysis assumes all of the following except

Accepted Answer

CVP analysis assumes that inventory levels will remain constant, not increase or decrease.

Question 10

CVP stands for Company-Volume-Profit.

Accepted Answer

CVP stands for Cost-Volume-Profit.

Question 11

The contribution margin ratio is the unit contribution margin divided by the variable cost per unit.

Accepted Answer

The contribution margin ratio is actually the unit contribution margin divided by the selling price per unit, not the variable cost per unit.

Question 12

________ should be subtracted from the sales price per unit to compute the unit contribution margin.

Accepted Answer

The unit contribution margin is calculated by subtracting all variable costs from the sales price per unit. This includes both variable production costs and variable selling and administrative expenses, not just variable inventoriable product costs or variable period costs, and does not include fixed costs.

Question 13

Managers can quickly forecast the total contribution margin by multiplying the

Accepted Answer

The total contribution margin can be quickly forecasted by multiplying the projected sales revenue by the contribution margin ratio. This method directly applies the proportion of sales revenue that is not consumed by variable costs, providing an efficient way to estimate the total contribution margin.

Question 14

The unit contribution margin is computed by

Accepted Answer

The unit contribution margin is the amount by which a unit's sales price exceeds its variable cost of production. Therefore, it is computed by subtracting the variable cost per unit from the sales price per unit. Choice A correctly identifies this calculation.

Question 15

If a unit sells for $12.50 and has a variable cost of $3.25, its contribution margin per unit is $9.25.

Accepted Answer

Contribution margin per unit is calculated as selling price per unit minus variable cost per unit. Therefore, $12.50 - $3.25 = $9.25.

Question 16

The contribution margin per unit is how much profit each unit contributes after fixed costs are considered.

Accepted Answer

The contribution margin per unit measures how much each unit sold contributes towards covering fixed costs and generating profit, but it does not include fixed costs in its calculation; it's calculated by subtracting variable costs per unit from the selling price per unit. Fixed costs are considered separately when calculating the overall profitability of a product or business.

Question 17

By multiplying ________ and then subtracting fixed costs, managers can quickly forecast the operating income.

Accepted Answer

The correct method to quickly forecast operating income involves multiplying the projected sales revenue by the contribution margin ratio and then subtracting fixed costs. The contribution margin ratio is calculated as (Sales - Variable Costs) / Sales, and it represents the percentage of each sales dollar that contributes to covering fixed costs and generating profit.

Question 18

CVP assumes that inventory levels will not change.

Accepted Answer

CVP (Cost-Volume-Profit) analysis assumes that inventory levels will remain constant throughout the analysis period. This assumption is made to simplify the analysis and to focus on the impact of changes in sales volume, selling price, variable costs, and fixed costs on a company's profitability. However, in reality, inventory levels may fluctuate depending on various factors such as demand, production capacity, lead time, ordering cost, and carrying cost.

Question 19

Gross margin is another term for net income.

Accepted Answer

Gross margin is the difference between revenue and cost of goods sold, whereas net income is the profit after all expenses have been deducted from revenue.

Question 20

The contribution margin derived from different products is not used to motivate the sales force to increase sales of the most profitable products.

Accepted Answer

The contribution margin derived from different products is often used as a tool to incentivize the sales force to focus on selling the most profitable products, as it can be a key metric in determining their commission or bonus structure.

Quiz 7: Cost-Volume-Profit Analysis