MCQs – CVP – Contribution

Margin
Q1
 Exhibit B

 The estimated unit costs for a company planning to produce 20,000 units this period
are as follows:

Sales price per unit $200

Direct materials/unit $ 50
Direct labor/unit $ 40
Variable overhead/unit $ 10
Fixed overhead/unit $ 8
Variable selling costs/unit $ 3
Fixed selling costs/unit$ $ 2
 Using information from Exhibit B, what is contribution margin per unit?
 $110.
 $97.
 $92.
 $100.
 You Answered Correctly! (b)
 Contribution margin per unit is defined as sales price per unit less variable costs per
unit. In this case: $200 sales price − ($50 direct materials + $40 direct labor + $10
variable overhead + $3 variable selling cost) = $97 contribution margin per unit.
 Q2
 The WEQ Company currently has a contribution margin of $50 per unit. It is
considering decreasing shipping costs from $9 per unit to $5 per unit and increasing
fixed administrative expenses from $7 per unit to $12 per unit. If both of these
changes are implemented, what will be WEQ's new contribution margin per unit?
 $49 per unit.
 $54 per unit.
 $45 per unit.
 $50 per unit.
 You Answered Correctly! (b)
 Correct. Contribution margin represents the amount of revenue left over after all
variable costs have been paid. Contribution margin per unit is the selling price per
unit less variable costs per unit. Changes in variable costs per unit impact the
contribution margin per unit while changes in fixed costs per unit do not. If WEQ
decreases shipping costs by $4 per unit then its contribution margin will increase by
$4 per unit. The increase in administrative expenses will not change the contribution
margin per unit as fixed costs (like administrative expenses) are not a part of the
contribution margin. This means these two actions will increase the contribution
margin to $54 per unit ($50 + $4).
 Q3
 An analyst gathers the following data about a financial calculator produced and sold
by a company
 Unit selling price = $60
 Quantity sold = 100,000
 Unit variable costs = $35
 Fixed costs = $200,000
 What is the contribution margin per unit and total contribution margin?
 Contribution margin per unit is $23 and total contribution margin is $2,500,000.
 Contribution margin per unit is $25 and total contribution margin is $2,500,000.
 Contribution margin per unit is $25 and total contribution margin is $2,300,000.
 Contribution margin per unit is $23 and total contribution margin is $2,300,000.
 This Answer is Correct (b)
 The contribution margin per unit is the unit selling price less the unit variable costs.
The total contribution margin is the contribution margin per unit times the quantity
of units sold. Thus, the contribution margin per unit is $60 − $35 = $25; and the
total contribution margin is $25 × 100,000 = $2,500,000.
 Q4
 Seating Solutions sells unassembled wood chairs for $85. Variable production costs
for each chair are $9 and fixed production costs are $24. The firm is considering
selling the chairs fully assembled for $115 each. Seating Solutions’ fixed production
costs for assembling one chair are $12, and its net income per unit for the assembled
chairs is $11 greater than its net income per unit for the unassembled chairs. This
means that the firm's variable production costs for assembling one chair are:
 $7.
 $11.
 $17.
 $21.
 This Answer is Correct (a)
 Net income per unit is calculated as Sales Price Per Unit – Variable Cost Per Unit –
Fixed Cost Per Unit. This means the net income per unassembled chair is $52 (or
$85 − $9 − $24). If the sales price per assembled chair is expected to be $115, the
fixed cost per assembled chair is expected to be $36 (or $24 + $12), and the net
income per assembled chair is expected to be $63 (or $52 + $11), the variable cost
per assembled chair would have to be $16 (or $115 − $63 − $36). This figure is
calculated by working backwards through the formula for the missing element, in
this case the variable cost per unit on an assembled chair. Since the variable cost of
 Q5
 The LPG Company currently has a contribution margin of $25 per unit. It is
considering increasing sales commissions from $4 per unit to $7 per unit and
reducing sales salaries from $10 per unit to $8 per unit. If both of these changes are
implemented, what will be LPG's new contribution margin per unit?

 $24 per unit.

 $27 per unit.
 $22 per unit.
 $25 per unit.

 This Answer is Correct ©

 Correct. Contribution margin represents the amount of revenue left over after all
variable costs have been paid. Contribution margin per unit is the selling price per
unit less variable costs per unit. Changes in variable costs per unit impact the
contribution margin per unit while changes in fixed costs per unit do not. If LPG
increases sales commissions by $3 per unit then its contribution margin will
decrease by $3 per unit. The reduction in sales salaries will not change the
contribution margin per unit as fixed costs (like sales salaries) are not a part of the
contribution margin. This means these two actions will reduce the contribution
 Q6
 The TJP Company currently has a contribution margin of $95 per unit. It is
considering increasing sales salaries from $13 per unit to $17 per unit and
decreasing administrative expenses from $15 per unit to $12 per unit. If both of
these changes are implemented, what will be TJP's new contribution margin per
unit?

 $95 per unit.

 $94 per unit.
 $91 per unit.
 $98 per unit.

 This Answer is Correct (a)

 Correct. Contribution margin represents the amount of revenue left over after all
variable costs have been paid. Contribution margin per unit is the selling price per
unit less variable costs per unit. Changes in variable costs per unit impact the
contribution margin per unit while changes in fixed costs per unit do not. Sales
salaries and administrative expenses are both fixed costs. This means that these
actions will have no impact on TJP's contribution margin per unit.
 Q7
 Audrey’s Ice Cream Shop sells homemade ice cream treats. The contribution margin
for the shop is currently 45%. Audrey wants to increase the shop’s sales revenue by
$15,000 without increasing fixed costs. Calculate the increase in operating income
that would result.

 $7,440
 $5,875
 $6,750
 $8,250

 This Answer is Correct ©

 A company’s contribution margin will increase by the product of its contribution
margin ratio and the increase in sales revenue. If fixed costs are not expected to
change, the increase in contribution margin is the same as the increase in operating
income. Based on a contribution margin of 45% and an increase in sales revenue of
$15,000, Audrey’s contribution margin and operating income will increase by $6,750
(45% × $15,000).
 Q8
 Allred Company sells its single product for $30 per unit. The contribution margin
ratio is 45%, and fixed costs are $10,000 per month. Allred has an effective income
tax rate of 40%. If Allred sells 1,000 units in the current month, Allred's variable
expenses would be:

 $16,500.
 $20,000.
 $9,900.
 $13,500.

 This Answer is Correct (a)

 Variable expenses are calculated as:
 Variable expenses = (1 − contribution margin ratio) × (sales amount)
 Sales amount = ($30) × (1,000 units) = $30,000
 Variable expenses = (1 − 0.45) × ($30,000)
 Variable expenses = (0.55) × ($30,000) = $16,500.
 Q9
 A company produces and sells 2,000 units of finished goods and incurs $60,000 of
fixed costs annually. The contribution margin is $60 per unit, and variable cost is $40
per unit. If the company expects sales quantities to increase by 10% next year, the
operating profit will be
 *Source: Retired ICMA CMA Exam Questions.
 $60,000.
 $72,000.
 $120,000.
 $132,000.
 This Answer is Correct (b)
 Units sold will increase to 2,200 in the next year. The new contribution margin will
be $132,000 (2,200 × $60). Fixed costs will remain at $60,000. This results in
operating profit of $72,000.
 Q10
 An analyst calculates the dollar sales breakeven point for a product as $500,000. The
product sells for $25 per unit. Fixed costs are $150,000. What is the contribution
margin per unit?

 $17.50.
 $7.50.
 $25.00.
 $0.00.

 This Answer is Correct (b)

 At the operating breakeven point total operating revenues and total operating costs
are equal. Thus, operating income is zero. A common method for computing the
breakeven point is Revenues − Variable costs − Fixed costs = Operating income.
Substituting the appropriate values into this equation results in $500,000 − Variable
costs − $150,000 = $0. Total variable costs = $500,000 − $150,000 = $350,000.
Quantity sold = Revenues ÷ Unit selling price = $500,000 ÷ $25 = 20,000 units.
Unit variable costs = Total variable costs ÷ units = $350,000 ÷ 20,000 = $17.50.
Contribution margin = Price per unit − Variable cost per unit = $25.00 − $17.50 =
$7.50.
 Q11
 For the year just ended, Silverstone Company's sales revenue was $450,000.
Silverstone's fixed costs were $120,000 and its variable costs amounted to $270,000.
For the current year, sales are forecasted at $500,000. If the fixed costs do not
change, Silverstone's operating profits this year will be:

 $110,000.
 $200,000.
 $60,000.
 $80,000.

 This Answer is Correct (d)

 The operating profit is calculated as:
 Operating profit = (contribution margin ratio × sales revenue) − fixed costs
 Forecasted sales, current year = $500,000
 Contribution margin ratio, year just ended = (sales − variable costs) ÷ (sales)
 Contribution margin ratio, year just ended = ($450,000 − $270,000) ÷ ($450,000) =
0.4
 Operating profit = (0.4 × $500,000) − $120,000 = $200,000 − $120,000 = $80,000.
 Q12
A company reduces the rates of its product from $60 to $50. The price drop is
expected to result in a increase of sale from 650,000 to 812,500. The cost of
production of the product is $45.6 out of which $12 is the fixed cost which was
calculated by dividing the fixed costs by expected sales of 650,000. Fixed cost will
remain the same despite the increase in production to satisfy the sales requirement. If
the company wants to maintain a 20% target operating income on its sales revenue. To
achieve this target, the company must lower its variable cost of production by:

 $25.60 per unit.

 $33.60 per unit.
 $3.20 per unit.
 $4.40 per unit.
 This Answer is Correct (c)

 The target operating income is calculated by multiplying 20% by the new sales
revenue amount of $40625000 ($50 unit selling price × 812,500 units), to arrive at
$8,125,000 target operating income.
 Next, set up an equation which shows that target operating income is equal to total
sales less costs.
 Q13
 A produces educational software. Its unit cost structure, based upon an anticipated
production volume of 150,000 units, is:
Sales price $160
Variable costs 60
Fixed costs 55

 The marketing department has estimated sales for the coming year at 175,000 units,
which is within the relevant range of the companys cost structure. Companys
breakeven volume (in units) and anticipated operating income for the coming year
would amount to:

 96,250 units and $6,750,000 of operating income.

 96,250 units and $7,875,000 of operating income.
 82,500 units and $7,875,000 of operating income.
 82,500 units and $9,250,000 of operating income.

 This Answer is Correct (d)

 The breakeven point in units is calculated as:
 Q14

Sales of Product A = 40% B = 60%

Selling Price $4.00 $3.00
Variable Cost $2.50 $1.75
Fixed cost of the company is $75,000. Determine how many of each needs to be sold for Break Even?
Solution
Sales of Product A = 40% B = 60%
Selling Price $4.00 $3.00
Variable Cost $2.50 $1.75
Contribution Margin $1.50 $1.25

Weighted Average contribution margin – (0.40 x $1.50) + (0.60 x $1.25) = $1.35

Dividing fixed cost by the weighted average contribution margin we get BEP in units.
= $75,000 / $1.35 = 55,555

Product A = 5,5555 x 0.40 = 22,223

Product B = 55,555 x 0.60 = 33,334
 Q15

 The total sales in units of a company consist of 40% of Product A and 60% of Product B. The selling
prices are $4.00 for Product A and $3.00 for B. Variable costs are $2.50 and $1.75 for Products A and B,
respectively. Fixed costs for the company are $75,000. Determine the breakeven revenue.

 Solution
 1. Calculate the contribution margin per unit for each product individually:
Product A Product B
40% 60%
Selling price per unit $4.00 $3.00
Less: variable cost per unit 2.50 1.75
Contribution margin per unit $1.50 $1.25

 2. Calculate the weighted average contribution margin per unit based on the percentages of each item in the
product mix as a whole:

Weighted average contribution margin per unit = (0.40 × $1.50) + (0.60 × $1.25) = $1.35
 3. Divide the fixed costs by the weighted average contribution margin per unit to calculate the breakeven
number of total units:
$75,000 ÷ $1.35 = 55,555.55 total units or 55,556 units

 4. Determine the weighted average unit selling price by multiplying each product’s percentage of total sales
in units by its selling price:
(0.40 × $4) + (0.60 × $3) = $3.40

 5. Multiply the breakeven total units by the breakeven selling price to find the breakeven revenue:
55,556 × $3.40 = $188,890