Chapter 7

Contribution margin is the difference between:
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Contribution margin is the difference between:
a.sales and variable expense.
Alpha Company's projected sales for the coming year is $20,000,000. It has total variable cost of $10,000,000. Annual fixed operating costs amount to $12,000,000. Alpha's break-even point in sales dollars is:
24,000,000

Break-Even Sales Dollars = Total Fixed Cost / Contribution Margin Ratio = $12,000,000 / 0.50 = $24,000,000

The contribution margin ratio of 0.50 or 50% is computed as follows: ($20,000,000 - $10,000,000) / $20,000,000 = 0.50 or 50%
The break-even point is:
d.the point where total revenue equals total cost.
Which of following equations is used to obtain the total change in profits from a change in revenues?
Change in Profits = Contribution Margin Ratio × Change in Sales
Which of the following equations can be used to determine the number of units to be sold to earn a target income?
c.Number of Units to Earn Target Income = (Total Fixed Cost + Target Income) / Contribution Margin per Unit
In multiple-product break-even analysis, the sales mix is determined through:
c.sensitivity analysis.
Which of the following is an assumption of cost-volume-profit analysis?
a.Selling prices and costs are known with certainty.
Sapphire sells two products: ordinary laptops and premium laptops. Ordinary laptops are priced at $650 each and premium laptops are priced at $1,110 each. The variable cost per unit is $605 per ordinary laptop and $1,040 per premium laptop. Total fixed cost is $125,000. Sapphire's expected sales mix is four ordinary laptops to one premium laptop. Calculate the break-even point in units for ordinary laptops.
b.2,000 laptops

The four ordinary laptops in the package yield $180 (4 × $45) in contribution margin. The premium laptop in the package yields $70 in contribution margin. Thus, a package of five laptops (four ordinary and one premium) has a total contribution margin of $250.
Break-Even Packages=Total Fixed Cost / Package Contribution Margin=$125,000 / $250=500 packages
Ordinary Laptop Break-Even Units = 500 × 4 = 2,000
In cost-volume-profit analysis, a multiple-product problem is converted into a single-product problem by:
a.defining a particular sales mix in units.
Which of the following is true of sensitivity analysis?
d.It allows managers to vary costs, prices, and sales mix to show various possible break-even points.
Which of the following equations is used to calculate the degree of operating leverage?a.Degree of Operating Leverage = Total Contribution Margin / Operating IncomeAquamarine Company plans to sell 6,000 sewing machines at $75 each in the coming year. Aquamarine has unit variable cost of $60 and total fixed cost of $62,550. Compute the margin of safety for Aquamarine in terms of the number of units.1,830 sewing machines Contribution margin per sewing machine = $75 - $60 = $15Break-Even Units = Total Fixed Cost / Contribution Margin = $62,550 / $15 = 4,170 sewing machines Margin of Safety in Units = Sales - Break-Even Units = 6,000 sewing machines - 4,170 sewing machines = 1,830 sewing machines