Question 1

In evaluating the margin of safety, the
A)break-even point is not relevant.
B)higher the margin of safety ratio, the greater the margin of safety.
C)higher the dollar amount, the lower the margin of safety.
D)higher the margin of safety ratio, the lower the fixed costs.

Accepted Answer

The higher the margin of safety ratio, the greater the margin of safety. This is because the margin of safety ratio is calculated by dividing the difference between actual sales and breakeven sales by actual sales. A higher ratio means that a larger percentage of sales are exceeding the break-even point, indicating a greater cushion for unexpected decreases in sales. The break-even point is still relevant in calculating the margin of safety, as it is used to determine the level of sales needed to cover all fixed and variable costs. Higher dollar amount also indicates a higher margin of safety, as it means there is a larger cushion for unexpected decreases in sales. The margin of safety does not affect fixed costs.

Question 2

At the break-even point,
A)sales equal total variable costs.
B)contribution margin equals total variable costs.
C)contribution margin equals total fixed costs.
D)sales equal total fixed costs.

Accepted Answer

At the break-even point, the contribution margin (sales minus variable costs) equals total fixed costs. This is because all the variable costs have been covered by the sales, and the remaining income exactly covers the fixed costs, resulting in zero profit or loss.

Question 3

Sweet Manufacturing is planning to sell 400,000 hammers for $6 per unit.The contribution margin ratio is 20%.If Sweet will break even at this level of sales, what are the fixed costs?
A)$480,000
B)$1,120,000
C)$1,600,000
D)$1,920,000

Accepted Answer

Contribution margin per unit = Sales price per unit - Variable cost per unit

We know that the contribution margin ratio is 20%, which means the contribution margin per unit is 20% of the sales price per unit, or:

Contribution margin per unit = 0.2 x $6 = $1.20

At the break-even point, total sales revenue must equal total costs. Let X be the total fixed costs:

Total revenue = 400,000 x $6 = $2,400,000
Total variable costs = 400,000 x $4.80 = $1,920,000 (since variable cost per unit = sales price per unit - contribution margin per unit)

Total costs = Total fixed costs + Total variable costs = X + $1,920,000

At the break-even point, total revenue must equal total costs:

$2,400,000 = X + $1,920,000

X = $480,000

Therefore, the fixed costs are $480,000.

Question 4

Within the relevant range, the variable cost per unit
A)differs at each activity level.
B)remains constant at each activity level.
C)increases as production increases.
D)decreases as production increases.

Accepted Answer

Within the relevant range, the variable cost per unit remains constant at each activity level. This means that the cost to produce each additional unit remains the same as production levels increase, as long as the level of activity remains within a certain range.

Question 5

Contribution margin is
A)the amount of revenue remaining after deducting fixed costs.
B)available to cover fixed costs and contribute to income for the company.
C)sales less fixed costs.
D)unit selling price less unit fixed costs.

Accepted Answer

Contribution margin is defined as the amount of revenue remaining after deducting variable costs, which is then available to cover fixed costs and contribute to net income for the company. Choices A, C, and D incorrectly describe the concept by either focusing on fixed costs or inaccurately defining the calculation.

Question 6

Required sales in dollars to meet a target net income is computed by dividing
A)fixed costs plus target net income by unit contribution margin.
B)variable costs plus target net income by unit contribution margin.
C)fixed costs plus target net income by contribution margin ratio.
D)total costs plus target net income by contribution margin ratio.

Accepted Answer

To compute the required sales in dollars to meet a target net income, we need to use the contribution margin ratio. The formula for computing the required sales in dollars is as follows:

Fixed costs + target net income ÷ contribution margin ratio = required sales in dollars

This formula helps us determine the amount of sales needed to cover both fixed costs and the desired net income.

Question 7

The following monthly data are available for Seasons Company which produces only one product: Selling price per unit, $42; Unit variable expenses, $14; Total fixed expenses, $42,000; Actual sales for the month of June, 4,000 units.How much is the margin of safety for the company for June?
A)$70,000
B)$105,000
C)$63,000
D)$2,500

Accepted Answer

The answer of The following monthly data are available for...

Question 8

The contribution margin ratio increases when
A)fixed costs increase.
B)fixed costs decrease.
C)variable costs as a percentage of sales decrease.
D)variable costs as a percentage of sales increase.

Accepted Answer

The contribution margin ratio is calculated by dividing the contribution margin (sales revenue minus variable costs) by sales revenue. As variable costs decrease as a percentage of sales (either due to economies of scale, discounts on bulk purchases, or other factors), the numerator of this ratio increases and the denominator remains constant, resulting in a higher contribution margin ratio. Fixed costs are not a factor in this calculation.

Question 9

An example of a mixed cost is
A)direct materials.
B)supervisory salaries.
C)utility costs.
D)property taxes.

Accepted Answer

Mixed costs consist of both fixed and variable components. Utility costs are an example because they typically have a fixed base rate plus a variable rate that depends on usage.

Question 10

Danny's Lawn Equipment has actual sales of $800,000 and a break-even point of $520,000.How much is its margin of safety ratio?
A)35%
B)46%
C)54%
D)65%

Accepted Answer

The margin of safety ratio is calculated as (Actual Sales - Break-even Sales) / Actual Sales. So, ($800,000 - $520,000) / $800,000 = $280,000 / $800,000 = 0.35 or 35%.

Question 11

The amount by which actual or expected sales exceeds break-even sales is referred to as
A)contribution margin.
B)unanticipated profit.
C)margin of safety.
D)target net income.

Accepted Answer

Margin of safety measures the amount by which actual or expected sales exceed break-even sales. It is the cushion or buffer for a business, indicating how much sales can decline before the business starts incurring losses. Contribution margin is the amount left after deducting variable costs from sales revenue and is used to cover fixed costs and earn a profit. Unanticipated profit is not a standard accounting term and may refer to unexpected or unplanned profit. Target net income is the level of income a business aims to achieve and may be used to set sales targets or pricing strategies.

Question 12

Bolton Industries had actual sales of $1,000,000 when break-even sales were $600,000.What is the margin of safety ratio?
A)40%
B)33%
C)60%
D)67%

Accepted Answer

The margin of safety ratio is calculated as (Actual Sales - Break-even Sales) / Actual Sales. So, ($1,000,000 - $600,000) / $1,000,000 = $400,000 / $1,000,000 = 0.4 or 40%.

Question 13

In the Restin Company, maintenance costs are a mixed cost.At the low level of activity (80 direct labor hours), maintenance costs are $600.At the high level of activity (200 direct labor hours), maintenance costs are $1,100.Using the high-low method, what is the variable maintenance cost per unit and the total fixed maintenance cost? $\begin{array}{lll}&\text { Variable Cost Per Unit }&\text { Total Fixed Cost }\
\text { a. } & \$ 4.17 & \$ 267 \
\text { b. } & \$ 4.17 & \$ 500 \
\text { c. } & \$ 5.50 & \$ 220 \
\text { d. } & \$ 5.50 & \$ 400
\end{array}$

Accepted Answer

The answer of In the Restin Company, maintenance costs are...

Question 14

Chung, Inc.sells 100,000 wrenches for $24 per unit.Fixed costs are $700,000 and net income is $500,000.What should be reported as variable expenses in the CVP income statement?
A)$1,080,000
B)$1,200,000
C)$1,900,000
D)$1,700,000

Accepted Answer

We can use the contribution margin formula to find the variable expenses:

Contribution Margin = Sales - Variable Expenses

Net Income = (Sales - Variable Expenses) - Fixed Expenses
$500,000 = ($2,400,000 - Variable Expenses) - $700,000
$2,400,000 - Variable Expenses = $1,200,000
Variable Expenses = $2,400,000 - $1,200,000
Variable Expenses = $1,200,000

Therefore, the variable expenses should be reported as $1,200,000, which is option B.

Question 15

Cost-volume-profit analysis includes all of the following assumptions except
A)the behavior of costs is curvilinear throughout the relevant range.
B)costs can be classified accurately as either variable or fixed.
C)changes in activity are the only factors that affect costs.
D)all units produced are sold.

Accepted Answer

Cost-volume-profit analysis assumes that the behavior of costs is linear throughout the relevant range, not curvilinear.

Question 16

Wilton Co.reported the following results from the sale of 5,000 hammers in May: sales $200,000, variable costs $120,000, fixed costs $60,000, and net income $20,000.Assume that Wilton increases the selling price of hammers by 10% on June 1.How many hammers will have to be sold in June to maintain the same level of net income?
A)4,000
B)4,300
C)4,500
D)5,000

Accepted Answer

The answer of Wilton Co.reported the following results from the...

Quiz 5: Merchandising Operations and the Multiple-Step Income Statement

In evaluating the margin of safety, the

At the break-even point,

Sweet Manufacturing is planning to sell 400,000 hammers for $6 per unit.The contribution margin ratio is 20%.If Sweet will break even at this level of sales, what are the fixed costs?

Within the relevant range, the variable cost per unit

Contribution margin is

Required sales in dollars to meet a target net income is computed by dividing

The following monthly data are available for Seasons Company which produces only one product: Selling price per unit, $42; Unit variable expenses, $14; Total fixed expenses, $42,000; Actual sales for the month of June, 4,000 units.How much is the margin of safety for the company for June?

The contribution margin ratio increases when

An example of a mixed cost is

Danny's Lawn Equipment has actual sales of $800,000 and a break-even point of $520,000.How much is its margin of safety ratio?

The amount by which actual or expected sales exceeds break-even sales is referred to as

Bolton Industries had actual sales of $1,000,000 when break-even sales were $600,000.What is the margin of safety ratio?

Chung, Inc.sells 100,000 wrenches for $24 per unit.Fixed costs are $700,000 and net income is $500,000.What should be reported as variable expenses in the CVP income statement?

Cost-volume-profit analysis includes all of the following assumptions except