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 dont 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 companys 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