Accounting 202 - Chapter 7
The changes in cost and volume of the output have an effect on the company’s operating and net income. The study of this change is what we covered in the previous class on chapter seven. The quiz below is designed to test your understanding of this topic so far. Give it a try!
Questions and Answers
- 1.
The unit contribution margin is computed by:
- A.
Dividing the variable cost per unit by the sales revenue.
- B.
Subtracting the sales price per unit from the variable cost per unit
- C.
Subtracting the variable cost per unit from the sales price per unit
- D.
Dividing the sales revenue by variable cost per unit
Correct Answer
C. Subtracting the variable cost per unit from the sales price per unitExplanation
The unit contribution margin is a measure of how much each unit sold contributes to covering fixed costs and generating profit. It is calculated by subtracting the variable cost per unit from the sales price per unit. This calculation gives the amount of revenue that is available to cover fixed costs and contribute to profit after accounting for the variable costs associated with producing each unit.Rate this question:
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- 2.
Contribution margin ratio is computed by dividing:
- A.
Contribution margin by sales revenue.
- B.
contribution margin by operating income.
- C.
Sales revenue by contribution margin.
- D.
Operating income by contribution margin.
Correct Answer
A. Contribution margin by sales revenue.Explanation
The contribution margin ratio is calculated by dividing the contribution margin by the sales revenue. The contribution margin represents the amount of sales revenue that is available to cover fixed costs and contribute to profit. Dividing the contribution margin by the sales revenue gives us the contribution margin ratio, which indicates the proportion of each sales dollar that is available to cover fixed costs and contribute to profit. This ratio is important for analyzing the profitability and financial performance of a company.Rate this question:
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- 3.
The contribution margin ratio explains the percentage of each sales dollar that contributes towards:
- A.
Variable costs
- B.
Sales revenue
- C.
Fixed costs and generating a profit
- D.
Period expenses
Correct Answer
C. Fixed costs and generating a profitExplanation
The contribution margin ratio is a financial metric that indicates the proportion of each sales dollar that is available to cover fixed costs and generate a profit. It helps determine the profitability of a company by measuring the amount of revenue that exceeds variable costs. A higher contribution margin ratio means that a larger percentage of each sales dollar is available to contribute towards fixed costs and generate profit. Therefore, the correct answer is "fixed costs and generating a profit".Rate this question:
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- 4.
To compute the unit contribution margin, __________ should be subtracted from the sales price per unit.
- A.
A. only variable period costs
- B.
only variable inventoriable product costs
- C.
All variable costs
- D.
All fixed costs
Correct Answer
C. All variable costsExplanation
To compute the unit contribution margin, all variable costs should be subtracted from the sales price per unit. This is because the unit contribution margin is the amount of revenue remaining after deducting all variable costs associated with producing and selling the product. By subtracting all variable costs, the company can determine how much each unit contributes towards covering fixed costs and generating profit.Rate this question:
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- 5.
Managers can quickly forecast the operating income by multiplying _________ and then subtracting fixed costs.
- A.
Projected sales revenue by the contribution margin ratio
- B.
Projected sales units by the contribution margin ratio
- C.
Projected sales revenue by the unit contribution margin
- D.
Projected sales units by the variable cost ratio
Correct Answer
A. Projected sales revenue by the contribution margin ratioExplanation
Managers can quickly forecast the operating income by multiplying the projected sales revenue by the contribution margin ratio and then subtracting fixed costs. The contribution margin ratio represents the percentage of each sales dollar that is available to cover fixed costs and contribute to operating income. By multiplying the projected sales revenue by this ratio, managers can estimate the amount of contribution margin available. Subtracting the fixed costs from this amount gives the forecasted operating income.Rate this question:
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- 6.
Managers can quickly forecast the total contribution margin by dividing the projected:
- A.
Sales revenue by the contribution margin ratio.
- B.
Sales units by the contribution margin ratio.
- C.
Sales revenue by the unit contribution margin.
- D.
Sales units by the variable cost ratio.
Correct Answer
A. Sales revenue by the contribution margin ratio.Explanation
To forecast the total contribution margin, managers can use the contribution margin ratio, which is the percentage of each sales dollar that contributes to covering fixed costs and generating profit. By dividing the projected sales revenue by the contribution margin ratio, managers can estimate the total contribution margin. This calculation takes into account both the sales revenue and the proportion of each dollar that contributes to covering costs and generating profit. Dividing sales units by the contribution margin ratio or by the variable cost ratio would not provide an accurate estimate of the total contribution margin.Rate this question:
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- 7.
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?
- A.
Gross margin
- B.
Unit contribution margin
- C.
Net income
- D.
Operating income
Correct Answer
B. Unit contribution marginExplanation
The unit contribution margin represents the excess of the selling price per unit of a product over the variable cost of obtaining and selling each unit. It is a measure of the profitability of each unit sold and is calculated by subtracting the variable cost per unit from the selling price per unit. This margin contributes towards covering fixed costs and generating a profit for the company.Rate this question:
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- 8.
Contribution margin ratio is computed by dividing:
- A.
Contribution margin by sales revenue.
- B.
Contribution margin by operating income.
- C.
Sales revenue by contribution margin.
- D.
Operating income by contribution margin.
Correct Answer
A. Contribution margin by sales revenue.Explanation
The contribution margin ratio is calculated by dividing the contribution margin by the sales revenue. The contribution margin represents the amount of revenue that is available to cover fixed costs and contribute towards profit. By dividing this amount by the sales revenue, we can determine the percentage of each sales dollar that is available to cover fixed costs and contribute towards profit. This ratio is important for analyzing the profitability of a company and making decisions regarding pricing, cost management, and product mix.Rate this question:
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- 9.
On a contribution margin income statement, to what is contribution margin equal?
- A.
Fixed expenses plus variable expenses
- B.
Sales revenues minus variable expenses
- C.
Fixed expenses minus variable expenses
- D.
Sales revenues minus fixed expenses
Correct Answer
B. Sales revenues minus variable expensesExplanation
The contribution margin is equal to sales revenues minus variable expenses. This means that the contribution margin represents the amount of revenue that is available to cover fixed expenses and contribute to profit after variable expenses have been deducted. By subtracting variable expenses from sales revenues, the contribution margin shows the portion of revenue that is contributing to covering fixed expenses and generating profit.Rate this question:
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- 10.
Akron Laser Wash sells deluxe car washes for $15 per customer. Variable costs are $9 per wash. Fixed costs are $40,000 per month. What is Akron Laser Wash’s contribution margin per car wash?
- A.
$0.40
- B.
$9.00
- C.
$6.00
- D.
$2.50
Correct Answer
C. $6.00Explanation
The contribution margin per car wash is calculated by subtracting the variable costs per wash from the selling price per wash. In this case, the selling price is $15 and the variable costs are $9, so the contribution margin per car wash is $15 - $9 = $6. This means that for each car wash sold, Akron Laser Wash contributes $6 towards covering its fixed costs and generating a profit.Rate this question:
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- 11.
Akron Laser Wash sells deluxe car washes for $15 per customer. Variable costs are $9 per wash. Fixed costs are $40,000 per month. What is Akron Laser Wash’s contribution margin ratio?
- A.
40%
- B.
250%
- C.
6%
- D.
60%
Correct Answer
A. 40%Explanation
The contribution margin ratio is calculated by subtracting the variable costs per unit from the selling price per unit, and then dividing that by the selling price per unit. In this case, the selling price per unit is $15 and the variable costs per unit are $9, so the contribution margin per unit is $6. To calculate the contribution margin ratio, we divide the contribution margin per unit by the selling price per unit and multiply by 100. Therefore, the contribution margin ratio for Akron Laser Wash is 40%.Rate this question:
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- 12.
Akron Laser Wash sells deluxe car washes for $15 per customer. Variable costs are $9 per wash. Fixed costs are $40,000 per month. What is the projected monthly income if 12,000 patrons visit the car wash each month?
- A.
$180,000
- B.
$108,000
- C.
$72,000
- D.
None of the above
Correct Answer
C. $72,000Explanation
The projected monthly income can be calculated by subtracting the total variable costs from the total revenue. In this case, the revenue per customer is $15 and the variable cost per wash is $9. Therefore, the revenue from 12,000 patrons would be 12,000 * $15 = $180,000. The total variable costs would be 12,000 * $9 = $108,000. Subtracting the variable costs from the revenue gives us $180,000 - $108,000 = $72,000. Therefore, the projected monthly income is $72,000.Rate this question:
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- 13.
The formula used to find the number of units that need to be sold in order to breakeven or generate a target profit is:
- A.
(fixed expenses + operating income) / contribution margin ratio.
- B.
(fixed expenses + operating income) / contribution margin per unit.
- C.
(fixed expenses - operating income) / contribution margin ratio.
- D.
(fixed expenses - operating income) / contribution margin per unit.
Correct Answer
B. (fixed expenses + operating income) / contribution margin per unit.Explanation
The correct answer is (fixed expenses + operating income) / contribution margin per unit. This formula is used to calculate the number of units that need to be sold in order to break even or generate a target profit. By dividing the sum of fixed expenses and operating income by the contribution margin per unit, we can determine the quantity of units required to cover all costs and achieve the desired profit.Rate this question:
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- 14.
The formula used to find the sales revenue (sales in dollars) needed in order to breakeven or generate a target profit is:
- A.
(fixed expenses + operating income) / contribution margin ratio.
- B.
(fixed expenses + operating income) /contribution margin per unit.
- C.
(fixed expenses - operating income) / contribution margin ratio.
- D.
(fixed expenses - operating income) / contribution margin per unit.
Correct Answer
A. (fixed expenses + operating income) / contribution margin ratio.Explanation
The correct answer is (fixed expenses + operating income) / contribution margin ratio. This formula is used to calculate the sales revenue needed to break even or generate a target profit. The fixed expenses and operating income are added together and then divided by the contribution margin ratio. The contribution margin ratio represents the percentage of each sales dollar that is available to cover fixed expenses and contribute to profit. By using this formula, businesses can determine how much sales revenue is required to cover their costs and achieve their profit goals.Rate this question:
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- 15.
Sales below the breakeven point indicate a ______, whereas sales above the breakeven point indicate a ____.
- A.
Loss; loss
- B.
Loss; profit
- C.
Profit; profit
- D.
Profit; loss
Correct Answer
B. Loss; profitExplanation
Sales below the breakeven point indicate a loss because the company is not generating enough revenue to cover its fixed and variable costs. On the other hand, sales above the breakeven point indicate a profit because the company is generating enough revenue to cover its costs and have money left over.Rate this question:
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- 16.
The Sweet Factory produces and sells specialty fudge. The selling price per pound is $20, variable costs are $12 per pound, and total fixed costs are $6,000. How many pounds of fudge must The Sweet Factory sell to breakeven?
- A.
15,000
- B.
300
- C.
750
- D.
188
Correct Answer
C. 750Explanation
To calculate the breakeven point, we need to determine the contribution margin per unit. The contribution margin is the selling price per unit minus the variable cost per unit. In this case, the contribution margin per pound of fudge is $20 - $12 = $8.
To cover the fixed costs of $6,000, we divide the fixed costs by the contribution margin per pound: $6,000 / $8 = 750 pounds. Therefore, The Sweet Factory must sell 750 pounds of fudge to breakeven.Rate this question:
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- 17.
Which of the following statements is TRUE if the sales price per unit increases while the variable cost per unit and total fixed costs remain constant?
- A.
The contribution margin increases and the breakeven point decreases.
- B.
The contribution margin decreases and the breakeven point decreases.
- C.
The contribution margin increases and the breakeven point increases .
- D.
The contribution margin decreases and the breakeven point increases.
Correct Answer
A. The contribution margin increases and the breakeven point decreases.Explanation
When the sales price per unit increases while the variable cost per unit and total fixed costs remain constant, the contribution margin increases. The contribution margin is the difference between the sales price per unit and the variable cost per unit, so when the sales price per unit increases, the contribution margin also increases. Additionally, the breakeven point decreases because the contribution margin is higher, meaning that fewer units need to be sold to cover the fixed costs and start generating a profit.Rate this question:
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- 18.
Which of the following statements is TRUE if the variable cost per unit decreases while the sales price per unit and total fixed costs remain constant?
- A.
The contribution margin increases and the breakeven point decreases.
- B.
The contribution margin decreases and the breakeven point decreases.
- C.
The contribution margin increases and the breakeven point increases.
- D.
The contribution margin decreases and the breakeven point increases.
Correct Answer
A. The contribution margin increases and the breakeven point decreases.Explanation
If the variable cost per unit decreases while the sales price per unit and total fixed costs remain constant, it means that the company is able to produce each unit at a lower cost. This results in a higher contribution margin, which is the difference between the sales price per unit and the variable cost per unit. A higher contribution margin means that each unit sold contributes more towards covering the fixed costs and generating profit. As a result, the breakeven point, which is the point at which the company covers all its costs and starts making a profit, decreases.Rate this question:
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- 19.
Which of the following statements is TRUE if the fixed costs increase while the sales price per unit and variable costs per unit remain constant?
- A.
The contribution margin increases and the breakeven point decreases.
- B.
The contribution margin decreases and the breakeven point increases.
- C.
The contribution margin stays the same and the breakeven point decreases.
- D.
The contribution margin stays the same and the breakeven point increases.
Correct Answer
D. The contribution margin stays the same and the breakeven point increases.Explanation
If the fixed costs increase while the sales price per unit and variable costs per unit remain constant, the contribution margin (sales price per unit minus variable costs per unit) will stay the same. However, since the fixed costs have increased, the breakeven point (the point at which total revenue equals total costs) will increase as well. This means that the company will need to sell more units in order to cover the higher fixed costs and reach the breakeven point. Therefore, the statement "The contribution margin stays the same and the breakeven point increases" is true.Rate this question:
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- 20.
If the sale price per unit decreases and variable costs remain the same, what will be the effect on the contribution margin ratio?
- A.
It will increase.
- B.
It will decrease.
- C.
It will remain the same.
- D.
It is impossible to determine with the given information.
Correct Answer
B. It will decrease.Explanation
If the sale price per unit decreases and variable costs remain the same, the contribution margin ratio will decrease. The contribution margin ratio is calculated by subtracting the variable costs per unit from the sale price per unit and then dividing by the sale price per unit. When the sale price per unit decreases, the numerator of the ratio decreases, resulting in a lower contribution margin ratio.Rate this question:
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- 21.
Which of the following statements is TRUE if the variable cost per unit increases while the sale price per unit and total fixed costs remain constant?
- A.
Breakeven point in units increases.
- B.
Breakeven point in units decreases.
- C.
Breakeven point in units remains the same.
- D.
Contribution margin ratio increases.
Correct Answer
A. Breakeven point in units increases.Explanation
If the variable cost per unit increases while the sale price per unit and total fixed costs remain constant, the breakeven point in units will increase. This is because the breakeven point is the point at which total revenue equals total costs, and an increase in variable cost per unit means that more units need to be sold in order to cover the fixed costs and reach the breakeven point. Therefore, the correct answer is that the breakeven point in units increases.Rate this question:
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- 22.
Which of the following statements is TRUE if total fixed costs decrease while the sale price per unit and variable costs per unit remain constant?
- A.
Contribution margin increases.
- B.
Contribution margin decreases.
- C.
Breakeven point in units decreases.
- D.
Breakeven point in units increases.
Correct Answer
C. Breakeven point in units decreases.Explanation
If total fixed costs decrease while the sale price per unit and variable costs per unit remain constant, the breakeven point in units will decrease. This is because the breakeven point is the point at which total revenue equals total costs, and a decrease in fixed costs means that less units need to be sold to cover the remaining fixed costs. Therefore, the breakeven point in units decreases.Rate this question:
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- 23.
Which of the following statements is TRUE if both fixed expenses and the sale price per unit increase while variable costs per unit are unchanged?
- A.
Breakeven point in units could increase, decrease, or remain the same.
- B.
Breakeven point in units increases.
- C.
Breakeven point in units decreases.
- D.
Breakeven point in units remains unchanged.
Correct Answer
A. Breakeven point in units could increase, decrease, or remain the same.Explanation
If both fixed expenses and the sale price per unit increase while variable costs per unit remain unchanged, the breakeven point in units could increase because the increase in fixed expenses and sale price per unit would require a higher number of units to be sold in order to cover the costs and reach the breakeven point. On the other hand, the breakeven point in units could also decrease if the increase in sale price per unit leads to higher profit margins, allowing the company to reach the breakeven point with a lower number of units sold. Lastly, the breakeven point in units could remain unchanged if the increase in fixed expenses and sale price per unit is offset by other factors, such as an increase in demand or a decrease in variable costs per unit.Rate this question:
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- 24.
Fixed costs divided by weighted-average contribution margin per unit equals:
- A.
Contribution margin ratio.
- B.
Margin of safety ratio.
- C.
Break-even sales in dollars.
- D.
Break-even sales in units.
Correct Answer
D. Break-even sales in units.Explanation
The formula for calculating the break-even point is fixed costs divided by the weighted-average contribution margin per unit. This formula helps determine the number of units that need to be sold in order to cover all fixed costs and achieve a break-even point. Therefore, the correct answer is break-even sales in units.Rate this question:
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- 25.
Contribution margin less fixed costs yields:
- A.
Operating income.
- B.
Sales.
- C.
Variable costs.
- D.
None of the above.
Correct Answer
A. Operating income.Explanation
The contribution margin is the amount left over from sales revenue after deducting variable costs. Fixed costs are not included in the calculation of contribution margin. Therefore, subtracting fixed costs from the contribution margin will result in operating income, which represents the profit or loss generated from the company's core operations.Rate this question:
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- 26.
Vango Industries sells two products, Basic models and Deluxe models. Basic models sell for $40 per unit with variable costs of $30 per unit. Deluxe models sell for $48 per unit with variable costs of $40 per unit. Total fixed costs for the company are $76,000. Vango Industries typically sells three Basic models for every Deluxe model. What is the breakeven point in total units?
- A.
6,909 units
- B.
8,000 units
- C.
13,818 units
- D.
4,000 units
Correct Answer
B. 8,000 unitsExplanation
The breakeven point is the point at which the company's total revenue equals its total costs, resulting in neither profit nor loss. To calculate the breakeven point, we need to determine the contribution margin per unit for each product. The contribution margin is the difference between the selling price and the variable cost per unit. For Basic models, the contribution margin is $40 - $30 = $10 per unit. For Deluxe models, the contribution margin is $48 - $40 = $8 per unit.
Since Vango Industries typically sells three Basic models for every Deluxe model, the ratio of Basic to Deluxe models sold is 3:1. Therefore, the contribution margin per unit considering this ratio is (3 * $10) + (1 * $8) = $38.
To find the breakeven point in total units, we divide the total fixed costs ($76,000) by the contribution margin per unit ($38).
$76,000 / $38 = 2,000 units.
However, this calculation only accounts for Deluxe models. Since the ratio of Basic to Deluxe models sold is 3:1, we need to multiply the breakeven point by 4 to include the Basic models.
2,000 units * 4 = 8,000 units.
Therefore, the breakeven point in total units is 8,000 units.Rate this question:
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- 27.
Reynold Coffee sells three large coffees for every two small ones. A small coffee sells for $4 per cup, with a variable cost of $2 per cup. A large coffee sells for $5 per cup with a variable cost of $3 per cup. What is the weighted- average contribution margin?
- A.
$2.00
- B.
$0.40
- C.
$7.20
- D.
$0.50
Correct Answer
A. $2.00Explanation
The weighted-average contribution margin is calculated by taking the weighted average of the contribution margin for each product. The contribution margin for a product is calculated by subtracting the variable cost per cup from the selling price per cup. In this case, the contribution margin for a small coffee is $4 - $2 = $2, and the contribution margin for a large coffee is $5 - $3 = $2. The weight of each product is determined by the ratio of the number of sales for each product. Since three large coffees are sold for every two small ones, the weight for large coffees is 3/5 and the weight for small coffees is 2/5. Therefore, the weighted-average contribution margin is (3/5) * $2 + (2/5) * $2 = $2. So, the correct answer is $2.00.Rate this question:
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- 28.
A company’s margin of safety can be stated:
- A.
In units.
- B.
In dollars.
- C.
As a percentage of sales.
- D.
As any of the above.
Correct Answer
D. As any of the above.Explanation
The company's margin of safety can be stated in units, dollars, or as a percentage of sales. This means that the margin of safety can be expressed in different ways depending on the context or preference of the person analyzing the company's financials.Rate this question:
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- 29.
A company’s margin of safety is computed as:
- A.
Expected sales – actual sales.
- B.
Actual sales – expected sales.
- C.
Expected sales – sales at breakeven.
- D.
Sales at breakeven – expected sales.
Correct Answer
B. Actual sales – expected sales.Explanation
The margin of safety is a measure of how much actual sales exceed or fall short of expected sales. By subtracting expected sales from actual sales, we can determine the difference between the two figures. This calculation helps companies assess their ability to absorb unexpected changes in sales and determine the level of risk associated with their current sales performance. Therefore, the correct answer is actual sales - expected sales.Rate this question:
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- 30.
Total predicted sales (in units) minus total break-even sales in units divided by total predicted sales (in units) yields:
- A.
Contribution margin ratio.
- B.
Contribution margin per unit.
- C.
Margin of safety percentage.
- D.
Percent of sales mix.
Correct Answer
C. Margin of safety percentage.Explanation
The formula given calculates the margin of safety percentage. Margin of safety is the difference between the actual sales and the break-even sales, expressed as a percentage of the total predicted sales. It measures the cushion or buffer a company has in sales volume before it reaches the break-even point. Therefore, the formula provided is used to determine the margin of safety percentage.Rate this question:
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Mar 21, 2023Quiz Edited by
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Nov 15, 2012Quiz Created by
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