Exam 2 Study Packet Questions and Exercises SELF TEST/REVIEW

T/F: If product A has a higher unit contribution margin than Product B, then product A will also have a higher CM ratio than product B.

False

T/F: The break-even point occurs where the total contribution margin is equal to total variable expenses.

False

T/F: The break-even point can be expressed either in terms of units sold or in terms of total sales dollars.

True

T/F: If the sales mix changes, the break-even point may change.

True

T/F: For a given increase in sales dollars, a high CM ratio will result in a great increase in profits than will a low CM ratio.

True

T/F: If sales increase by 8%, and the degree of operating leverage is 4, then profits can be expected to increase by 12%.

False

T/F: The degree of operating leverage remains the same at all levels of sales.

False

T/F: Once the break-even point has been reached, net operating income will increase by the unit contribution margin for each additional unit sold.

True

T/F: A shift in sales mix toward less profitable products will cause the overall break-even point to fall.

False

T/F: Incremental analysis focuses on the differences in costs and revenues between alternatives.

True

T/F: If a company’s cost structure shifts toward higher fixed costs and lower variable costs, the company’s CM ratio will fall.

False

T/F: One way to compute the break-even point is to divide total sales by the CM ratio.

False

T/F: When a company has more than one product, a key assumption in break-even analysis is that the sales mix will not change.

True

Lester Company has a single product. The selling price is $50 and the variable cost is $30 per unit. The company’s fixed expense is $200,000 per month. What is the company’s unit contribution margin?

• $50

• $30

• $20

• $80

$20

Lester Company has a single product. The selling price is $50 and the variable cost is $30 per unit. The company’s fixed expense is $200,000 per month. What is the company’s contribution margin ratio?

• 60%

• 40%

• 167%

• 20%

40%

Lester Company has a single product. The selling price is $50 and the variable cost is $30 per unit. The company’s fixed expense is $200,000 per month. What is the company’s break-even in sales dollars?

• $500,000

• $33,333

• $200,000

• $400,000

$500,000

Lester Company has a single product. The selling price is $50 and the variable cost is $30 per unit. The company’s fixed expense is $200,000 per month. How many units would the company have to sell to attain target profits of $50,000?

• 10,000

• 12,500

• 15,000

• 13,333

12,500 units

Parker Company has provided the following data for the most recent year: net operating income $30,000; fixed expense $90,000; sales $200,000; CM ratio 60%. The company’s margin of safety in dollars is:

• $150,000

• $30,000

• $50,000

• $80,000

$50,000

Parker Company has provided the following data for the most recent year: net operating income $30,000; fixed expense $90,000; sales $200,000; CM ratio 60%. The margin of safety in percentage form is:

• 60%

• 75%

• 40%

• 25%

25%

Parker Company has provided the following data for the most recent year: net operating income $30,000; fixed expense $90,000; sales $200,000; CM ratio 60%. What is the company’s total contribution margin?

• $110,000

• $120,000

• $170,000

• $200,000

$120,000

Parker Company has provided the following data for the most recent year: net operating income $30,000; fixed expense $90,000; sales $200,000; CM ratio 60%. What is the company’s degree of operating leverage?

• 0.25

• 0.60

• 1.25

• 4.00

4.00

If sales increase from $400,000 to $450,000, and if the degree of operating leverage is 6, net operating income should increase by:

• 12.5%

• 75%

• 67%

• 50%

75%

In multiple product companies, a shift in the sales mix from less profitable products to more profitable products will cause the company’s break-even point to

• increase

• decrease

• there will be no change in the break-even point

• none of these

decrease

Herman Corp. has two products, A and B, with the following total sales and total variable costs:

	product A	product B
Sales	$10,000	$30,000
Variable Expenses	$4,000	$24,000

What is the overall contribution margin ratio?

• 70%

• 50%

• 30%

• 40%

30%

SOLVE OUT ON PAPER TO GET ANSWERS!

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Hardee Company sells a single product. The selling price is $30 per unit and the variable expense is $18 per unit. The company’s most recent annual contribution format income statement is given below:

sales	$135,000
Variable Expense	$81,000
contribution margin	$54,000
fixed expenses	$48,000
net operating income	$6,000

1. compute contribution margin

2. compute cm ratio

3. compute break-even point in sales dollars

4. compute break-even point in units sold

5. how many units must be sold next year to double profits?

6. compute company’s degree of operating leverage

7. sales for next year in units are expected to increase by 5%. Using the degree of operating leverage, compute the expected percentage increase in net operating income

1. $12

2. 40%

3. $120,000

4. 4,000 units

5. 5,000 units

6. 9

7. 45%

8. Sales = $141,750

   Variable expenses = $85,050

   Contribution Margin = $56,700

   Fixed Expenses = $48,000

   Net operating income = $8700

T/F: a forecast of sales is the usual starting point in budgeting

True

T/F: A self-imposed budget is one prepared by top management and imposed on subordinate managers

False

T/F: budgets are planning devices rather than control devices

False

T/F: The basic idea behind responsibility accounting is that each manager’s performance should be judged by how well he or she manages those items under his or her control.

True

T/F: Ending inventories occur because an organization is unable to sell all that it had planned to sell during a period

False

T/F: The required production in units for a budget period is equal to expected unit sales for the period

False

T/F: because of the technical nature of budgeting, it is best to leave budgeting entirely in the capable hands of the accounting staff

False

T/F: the required raw materials purchases for a period equals the raw materials required for production.

False