Question 1

Bowe Corporation's fixed monthly expenses are $21, 000 and its contribution margin ratio is 61%.Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are $74, 000?

Accepted Answer

Profit = (CM ratio × Sales)- Fixed expenses
= (0.61 × $74, 000)- $21, 000
= $45, 140 - $21, 000
= $24, 140

Question 2

Which of the following is NOT a correct definition of the break-even point?

Accepted Answer

The break-even point is the point where total sales equal total expenses or the point where total contribution margin equals total fixed expenses. Option B is incorrect because at the break-even point, total profit is equal to zero, not equal to total fixed expenses.

Question 3

The records of the Dodge Corporation show the following results for the most recent year:  Given these data, the unit contribution margin was:

Accepted Answer

Selling price per unit = $256, 000 ÷ 16, 000 units = $16 per unit
Variable expense per unit = $160, 000 ÷ 16, 000 units = $10 per unit
Unit CM = Selling price per unit - Variable expense per unit
Unit CM = $16 per unit - $10 per unit = $6 per unit

Question 4

At a break-even point of 800 units sold, White Corporation's variable expenses are $8, 000 and its fixed expenses are $4, 000.What will the Corporation's net operating income be at a volume of 801 units?

Accepted Answer

Profit = (Unit CM × Q)- Fixed expenses
$0 = (Unit CM × 800 units)- $4, 000
Unit CM = $4, 000 ÷ 800 units = $5 per unit
Profit = ($5 per unit × 801 units)- $4, 000 = $5

Question 5

Garth Corporation 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

The answer of Garth Corporation sells a single product.If the...

Question 6

Florek Inc.produces and sells a single product.The company has provided its contribution format income statement for March.  If the company sells 5, 900 units, its net operating income should be closest to:

Accepted Answer

Selling price per unit = Sales ÷ Quantity sold
= $228, 000 ÷ 5, 700 units = $40 per unit
Variable expenses per unit = Variable expenses ÷ Quantity sold
= $131, 100 ÷ 5, 700 units = $23 per unit
Unit CM = Selling price per unit - Variable expenses per unit
= $40 per unit - $23 per unit = $17 per unit
Profit = (Unit CM × Q)- Fixed expenses
= ($17 per unit × 5, 900 units)- $86, 300 = $100, 300 - $86, 300 = $14, 000

Question 7

Brees Inc. , a company that produces and sells a single product, has provided its contribution format income statement for April.  If the company sells 5, 800 units, its total contribution margin should be closest to:

Accepted Answer

Selling price per unit = Sales ÷ Quantity sold
= $136, 400 ÷ 6, 200 units = $22 per unit
Variable expenses per unit = Variable expenses ÷ Quantity sold
Variable expenses per unit = $80, 600 ÷ 6, 200 units = $13 per unit
Unit CM = Selling price per unit - Variable expenses per unit
= $22 per unit - $13 per unit = $9 per unit
Total CM = Unit CM × Quantity sold
= $9 per unit × 5, 800 units = $52, 200

Question 8

Spartan Systems reported total sales of $300, 000, at a price of $20 and per unit variable expenses of $12, for the sales of their single product.  What is the amount of contribution margin if sales volume increases by 30%?

Accepted Answer

CM ratio = Contribution margin ÷ Sales = $120, 000 ÷ $300, 000 = 0.40
Contribution margin = CM ratio × Sales
Contribution margin = 0.40 × (1.3 × $300, 000)= $156, 000

Question 9

Assume a company sells a single product.If Q equals the level of output, P is the selling price per unit, V is the variable expense per unit, and F is the fixed expense, then the break-even point in sales dollars is:

Accepted Answer

The answer of Assume a company sells a single product.If...

Question 10

The margin of safety is:

Accepted Answer

The margin of safety is the excess of actual or budgeted sales over the break-even volume of sales. It indicates the amount by which sales can decrease before the company incurs a loss. It is a useful measure for evaluating the risk associated with a company's operations. Options A and B are incorrect because they refer to the excess of sales over variable or fixed expenses, respectively. Option D is incorrect because it refers to the excess of budgeted net operating income over actual net operating income, which is not related to the margin of safety.

Question 11

Bolding Inc.'s contribution margin ratio is 61% and its fixed monthly expenses are $42, 000.Assuming that the fixed monthly expenses do not change, what is the best estimate of the company's net operating income in a month when sales are $126, 000?

Accepted Answer

Profit = (CM ratio × Sales)- Fixed expenses
= (0.61 × $126, 000)- $42, 000
= $76, 860 - $42, 000
= $34, 860

Question 12

Lepage Corporation has provided its contribution format income statement for January.The company produces and sells a single product.  If the company sells 4, 700 units, its total contribution margin should be closest to:

Accepted Answer

Selling price per unit = Sales ÷ Quantity sold
= $211, 200 ÷ 4, 400 units = $48 per unit
Variable expenses per unit = Variable expenses ÷ Quantity sold
= $127, 600 ÷ 4, 400 units = $29 per unit
Unit CM = Selling price per unit - Variable expenses per unit
= $48 per unit - $29 per unit = $19 per unit
Total CM = Unit CM × Quantity sold
= $19 per unit × 4, 700 units = $89, 300

Question 13

The contribution margin ratio is equal to:

Accepted Answer

The contribution margin ratio is calculated by dividing the contribution margin (which is sales minus variable expenses) by sales. Therefore, the formula for contribution margin ratio is (Sales - Variable expenses)/Sales. Option B is the only choice that matches this formula. Option A is incorrect because it divides total manufacturing expenses by sales, which is a different calculation. Option C and D are both incorrect because they subtract the gross margin or contribution margin from sales and then divide that value by sales, which is not the correct formula for contribution margin ratio.

Question 14

The overall contribution margin ratio for a company producing three products may be obtained by adding the contribution margin ratios for the three products and dividing the total by three.

Accepted Answer

The overall contribution margin ratio for a company cannot be determined by simply averaging the contribution margin ratios for each product, as the individual sales mix of each product also plays a factor in determining the overall contribution margin ratio.

Question 15

If a company decreases the variable expense per unit while increasing the total fixed expenses, the total expense line relative to its previous position will:

Accepted Answer

Decreasing the variable expenses per unit means that the total variable expenses will decrease, leading to a shift downward in the total expense line. However, increasing the total fixed expenses will lead to a shift upward in the total expense line. Combining these changes, the total expense line will shift upward and have a flatter slope, as the decrease in variable expenses per unit will not be enough to offset the increase in fixed expenses.

Question 16

The break-even in units sold will decrease if there is an increase in:

Accepted Answer

The answer of The break-even in units sold will decrease...

Question 17

If Q equals the level of output, P is the selling price per unit, V is the variable expense per unit, and F is the fixed expense, then the degree of operating leverage is equal to:

Accepted Answer

The answer of If Q equals the level of output,...

Question 18

Ofarrell Corporation, a company that produces and sells a single product, has provided its contribution format income statement for March.  If the company sells 5, 400 units, its net operating income should be closest to:

Accepted Answer

Selling price per unit = Sales ÷ Quantity sold
= $205, 000 ÷ 5, 000 units = $41 per unit
Variable expenses per unit = Variable expenses ÷ Quantity sold
= $125, 000 ÷ 5, 000 units = $25 per unit
Unit CM = Selling price per unit - Variable expenses per unit
= $41 per unit - $25 per unit = $16 per unit
Profit = (Unit CM × Q)- Fixed expenses
= ($16 per unit × 5, 400 units)- $62, 400 = $86, 400 - $62, 400 = $24, 000

Question 19

Maack Corporation's contribution margin ratio is 16% and its fixed monthly expenses are $44, 000.If the company's sales for a month are $299, 000, what is the best estimate of the company's net operating income? Assume that the fixed monthly expenses do not change.

Accepted Answer

Profit = (CM ratio × Sales)- Fixed expenses
= (0.16 × $299, 000)- $44, 000
= $47, 840 - $44, 000
= $3, 840

Question 20

Contribution margin is the amount remaining after:

Accepted Answer

Contribution margin is calculated by deducting variable expenses from sales revenue. It represents the amount that is available to cover fixed expenses and contribute towards profits.

Quiz 2: Cost-Volume-Profit Relationships