Question

1. Carver Company produces a product which sells for $30. Variable manufacturing costs are $15 per unit. Fixed manufacturing costs are $5 per unit based on the current level of activity, and fixed selling and administrative costs are $4 per unit. The contribution margin per unit is:
   A. $3
   B. $15
   C. $8
   D. $12

2. Companies that have high contribution margin per dollar of sales have which of the following characteristics compared to companies with low contribution margin per dollar of sales?

1. Prices of the products or services they sell are much higher than the variable costs of their products or services
2. Prices of the products or services they sell are close to the variable costs of their products or services
3. Prices of the products or services they sell are usually much lower than the variable costs of their products or services
4. Sales personnel of such companies typically have little room to offer discounts on the prices of the products they sell.

3. A company is a defendant in a law suit. Management believes that there is a 55% chance the company will lose the case and can reasonably estimate losses as $100,000. How should the company account for this?

1. Increase Liability for $55,000 and increase Expense for $55,000
2. Disclose the contingent liability in notes to the financial statements
3. Increase Liability for $100,000 and increase Expense for $100,000
4. Neither disclose the contingent liability nor make any accounting entry

4. A company is a defendant in a law suit. Management believes that there is a 30% chance the company will lose the case and can reasonably estimate losses as $100,000. How should the company account for this?

1. Increase Liability for $30,000 and increase Expense for $30,000
2. Disclose the contingent liability in notes to the financial statements
3. Increase Liability for $100,000 and increase Expense for $100,000’
4. Neither disclose the contingent liability nor make any accounting entry

5. Assuming that the unit sales are unchanged, the total contribution margin will decrease if:
A. fixed expenses increase.
B. fixed expenses decrease.
C. variable expense per unit increases.
D. variable expense per unit decreases.

6. Which of the following is a disadvantage of the functional income statement compared to the contribution margin (variable cost) income statement?

1. It is not required by financial accounting standards, so preparing it requires a separate cost accounting system
2. It provides only historical information
3. It does not allow the reader to distinguish between variable and fixed costs
4. It typically shows lower profits

7. Why don’t all companies routinely prepare contribution margin income statements?

a. This income statement does not provide useful information for some companies.

b. It is not required for financial reporting purposes, so the company has to maintain a separate cost accounting system to prepare this income statement.

c. It can provide misleading information for managerial decision making

d. It typically shows lower profits

8. Company X has a contribution margin ratio of 0.6. It has fixed costs of $60,000/month. What amount of sales (in dollars) must it have to break even?

9. A company with high contribution margin generally

a. Also has fixed costs that are a low percentage of total costs

b. Also has fixed costs that are a high percentage of total costs

c. Has a high debt to assets ratio

d. Has low gross profits

10. Compared to a company whose fixed costs are a high percentage of its total costs, a company whose fixed costs are a low percentage of its total costs is more likely, to

a. Suffer greater losses when its operations are shut down

b. Suffer lower losses when its operations are shut down

c. Lay off more workers

d. None of the above

11. Company X sells its only product for $10 each. The company’s variable cost per unit is $11 and its fixed costs are $6,000 per month. How many units must the company sell to earn a (target) profit of $4,000 per month; i.e., $4,000 profit beyond the break even point?

1. 10,000
2. 6,000
3. 1,000
4. Never will earn a profit at any amount of sales

12. The GAAP income statement shows which of the following type of profit as a line item?

a. Gross profit

b. Contribution margin

c. Earnings before interest, depreciation, and taxes

d. All of the above

13. If the regular (“rack rate”) price of a night at the Buckhead Ritz Carlton is $300, its variable cost per room night is $20, and its total average cost (fixed plus variable) per night over the last year has been $90, what is the lowest possible rational price the hotel could charge for a room night?

a. $.01

b. $20.01

c. $90.01

d. 110.01

14. Companies with high contribution margin ratios are more likely than companies with low contribution margin ratios to

a. Expand operations

b. Offer substantial discounts on the regular price of its products

c. Shut down operations to reduce costs

d. Shut down operations rather than temporarily laying off workers

15. Compared to companies with high contribution margin ratios (60% to 90%), companies with very high contribution margin ratios, close or at 100%, are

a. More likely to offer a flat price for a high amount of service or product

b. Less likely to discount prices

c. Less likely to advertise to increase sales

d. b. and c.

16. Which is closest to the actual contribution margin ratio of a large soda sold at a fast-food restaurant?

a. 0.1

b. 0.4

c. 0.6

d. 0.9

17. Indicate which of the following industries or products generally is considered to have high contribution margin ratios? There can be more than one, so include in your answer the letter of each one you think is correct.

a. Perfume

b. Pharmaceuticals

c. Airlines

d. Luxury clothing

Answer 1

Question 1 A) 15 per units Sales 30 Less: Variable cost 15 Contribution margin 15

Question 2 A) Prices of the products or services they sell are much higher than the variable costs of their products or services Sales - Variable cost = contibution margin if sales is higher than variable cost, contibution margin is increase if sales is lower than variable cost, contribution margin is decrease.

Question 3 A) Increase Liability for $55,000 and increase Expense for $55,000 possible to estimate the value of the contigent liablity must have greater than 50% change of occuring. Contigent liablitites are the potential losses that may be occur in future event. Rocord as a Loss in the Expenses in income statement and treated as Liablitiy. If contigent liablity loss is less than 50% chance of occuring. Then the contigent liablity are not in balance sheet and disclose in notes to income statement.

Question 4 B) Disclose the contingent liability in notes to the financial statements If contigent liablity loss is less than 50% chance of occuring. Then the contigent liablity are not in balance sheet and disclose in incomestatement.

Question 5 C) variable expense per unit increases Contibution margin = sales - variable expenses If variable expenses are increase contibution margin are decreases. Sales 30 Sales 30 Less: Variable cost 15 Less: Variable cost (increase by 5 per units) 20 = Contribution margin 15 Contribution margin 10 Contribution margin decraese 15 to 10.

Question 6 C) It does not allow the reader to distinguish between variable and fixed costs Financial income statemet contribution income statement Sales Sales Cost of Good sold Less: Less: Variable cost Gross profits Contribution margin Less: Operating expenses Less: Fixed cost = Operating income Operating income

Question 7 B) It is not required for financial reporting purposes, so the company has to maintain a separate cost accounting system to prepare this income statement Some compaines are sepratly prepare the cost accounting system as they clossly moniter ther cost structure.

Question 8 Breakeven sales (in dollar) = Fixed cost Contribution margin ratio II 100000 60000 0.6

Question 9 A) Also has fixed costs that are a low percentage of total costs Higher the contribution margin ratio, more the money able to cover the overheads expenses or fixed cost

Question 10 A) Suffer greater losses when its operations are shut down when the opration are shutdown, Fixed cost remain costant (rent, deprecaition, salary) Fixed cost are incurrend when opration are continue or shut down. which reduce the operating income of the business.

Question 11 A) 10,000 Units sell require to achive target profit 11 Fixed cost + Target profit Contribution margin per units 11 6,000 + 4,000 1 = 10,000

Question 12 D) All the above GAAP includes al the profits in the income statement. Gross profit Contribution margin Earnings before interest, depreciation, and taxes --

Question 14 A) Expand operation Higher the contribution margin, higher Sales. Which help to expand operation.

Question 15 D) B and c Decrease in sales also have the qualitative factor (like not good advertisment, discount) which reduce the company contribution margin.

Question 16 D) 0.9 or 90% Because in the resturant sale to the large soda are higher, which can increase the contribution margin of the resturatant.

Question 17 Band C А Perfume Sale of the perfume is not much as compare to the other products. So there contribution margin is less. B Pharmaceuticals Pharmaceuticals has the regular requirement of the pepole need. Its has the huge demand and supply in the market Pharmaceuticals has higher sale in market and they are produce in the less variable cost, which increase the contribution margin ratio of the company с Airline Airline has the high demand and sales of there travelling ticket in market. In airline variable cost is less like food, drinks in travelling plans (and some customer not incurred variable cost). so this increase the contribution margin. D Luxury clothing luxury clothing has the high demand in market but there variable cost is high, which reduce the contribution margin