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# Case Study

The margin of safety can be calculated by:

A) B) C) D)

Sales − (Fixed expenses/Contribution margin ratio). Sales − (Fixed expenses/Variable expense per unit). Sales − (Fixed expenses + Variable expenses). Sales − Net operating income.

A

000 • D .000 • C) $200.000 Contribution margin ratio 75% Degree of operating leverage 4 What is Hopi expecting total fixed expenses to be next year? • A) $75.000 • B) $100.000 • D) $225.000 Margin of safety $100.Hopi Corporation expects the following operating results for next year: Sales $400.

we will have: $300.000 .75 Fixed expenses = $225.000 Breakeven sales = $300. we will have: $400.000 Breakeven sales = Fixed expenses ÷ Contribution margin ratio Substituting the given information into the above equation.000 − Breakeven sales = $100.Breakeven sales = Margin of safety Substituting the given information into the above equation.Ans: D • Solution: Current sales .000 = Fixed expenses ÷ 0.

200 units.200 • D) $66.400 Variable expenses 445.674 • B .000 • B) $311. Sales (8.200 Contribution margin 319.900 Net operating income $ 68.300 If the company sells 8. its total contribution margin should be closest to: • A) $301.600 • C) $319. The company produces and sells a single product.400 units) $764.200 Fixed expenses 250.Escareno Corporation has provided its contribution format income statement for June.

200 ÷ 8.400 = $38 contribution margin per unit If 8. the total contribution margin will be 8.Ans: B Solution: Current contribution margin ÷ Current sales in units = Contribution margin per unit $319.200 units are sold.600. .200 × $38. or $311.

000 Variable expenses 60.000 Contribution margin 40.00 • D) $12.00 • B) $100.000 How much will the sale of one additional case add to Bronco's net operating income? • A) $250.50 • B .000 Net operating income $5.The Bronco Birdfeed Company reported the following information: Sales (400 cases) $100.000 Fixed expenses 35.00 • C) $150.

net operating income will increase by $100.Ans: B Solution: Current contribution margin ÷ Current sales in cases = Contribution margin per case $40.000 ÷ 400 = $100 contribution margin per case If one additional case is sold. .

000.The margin of safety in the Flaherty Company is $24.000 • B .000.000 • B) $32.000 • D) $16. its fixed expenses must be: • A) $8.000 and its variable expenses are $80. If the company's sales are $120.000 • C) $24.

000 Sales .000 Contribution margin ratio = Contribution margin ÷ Sales Contribution margin ratio = $ 40.000 . we will have: $120.Variable expenses = Contribution margin $120.Breakeven sales = Margin of safety Substituting the given information into the above equation. we will have: $96.000 = $40.$80.000 .000 Breakeven sales = $96.000 = Fixed costs ÷ 0.000 Contribution margin ratio = 0.000 .000 ÷ $120.Ans: B Solution: Current sales .33333 Breakeven sales = Fixed costs ÷ Contribution margin ratio Substituting the given information into the above equation.Breakeven sales = $24.33333 Fixed costs = $32.

and variable expenses are $60 per unit. and C are all correct. The company's sales average 500 units per month. B. C) The company's contribution margin ratio is 40%.000 per month. D) Responses A.• Dodero Company produces a single product which sells for $100 per unit. B) The fixed expenses remain constant at $24 per unit for any activity level within the relevant range. Fixed expenses total $12. Which of the following statements is correct? A) The company's break-even point is $12.000 per month. C .

$60 = $40 • Contribution margin ratio = Contribution margin per unit ÷ Selling price per unit • Contribution margin ratio = $40 ÷ $100 • Contribution margin ratio = 40% .000 ÷ $40 per unit = 300 units • 300 units × $100 selling price per unit = $30.000 • Q = $12.000 breakeven sales in dollars Answer B is not correct because fixed costs change as activity level changes Answer C is correct because: • Contribution margin per unit = Selling price per unit .Variable expenses per unit • = $100 .Ans: C Solution: Answer A is not correct because: • Sales = Variable expenses + Fixed expenses + Profit • $100Q = $60Q + $12.000 + $0 • $40Q = $12.

000 sales level. the degree of operating leverage will be: • A) 12 • B) 10 • C) 6 • D) 4 D .000.Holt Company's variable expenses are 70% of sales. If sales increase by $60. the degree of operating leverage is 10. At a $300.

000 × 70%) 252.000 Contribution margin 108.$9.$9.000 = $81.Ans: D Solution: Sales $300.000 Variable expenses ($300.000 Degree of operating leverage = Contribution margin ÷ Net operating income = $108.000 Sales ($300.000 Variable expenses ($360.000 = Fixed expenses .000 = 4.000 Net operating income $ 27.000 Contribution margin = Fixed expenses .Net operating income $90.000 Fixed expenses ? Net operating income $ ? Current degree of operating leverage = Current contribution margin ÷ Current net operating income 10 = $90.000 ÷ 10 = $9.000/$27.000 × 70%) 210.000 + $60.000) $360.0 .000 Fixed expenses = $90.000 Fixed expenses 81.000 .000 Contribution margin 90.000 ÷ Current net operating income Current net operating income = $90.

560 D .Gayne Corporation's contribution margin ratio is 12% and its fixed monthly expenses are $84. • A) $565.000. If the company's sales for a month are $738.000.000 • C) $88.560 • D) $4.440 • B) $654. what is the best estimate of the company's net operating income? Assume that the fixed monthly expenses do not change.

440 Contribution margin ($738.560 .000 × 12%) 88.Ans: D Solution: Sales $738.560 Fixed expenses 84.000 Variable expenses ($738.000 × 88%) 649.000 Net operating income $ 4.

000 Based on a market study.000 • B) $190.000 Variable expenses $600.000 • C) $205. Assuming that these changes are incorporated in its budget. what should be the budgeted net operating income? • A) $175. the company estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10% if $100.000 were spent on advertising.000 Fixed expenses $300.000 • D) $365.Wilson Company prepared the following preliminary budget assuming no advertising expenditures: Selling price $10 per unit Unit sales 100.000 C .

000 units × $11.000) 400.000 ÷ 100.Ans: C Solution: Sales (110.000 * Current variable expenses ÷ Current sales in units = Variable expense per unit $600.000 units × $6*) 660.000 Variable expenses (110.265.00 Contribution margin 605.000 Net operating income $ 205.000 = $6 variable expense per unit .000 Fixed expenses ($300.50) $1.000 + $100.

000 per month. The marketing manager believes that a $20. What should be the overall effect on the company's monthly net operating income of this change? • A) decrease of $160 • B) increase of $20.000 increase in the monthly advertising budget would result in a 180 unit increase in monthly sales.160 • C) decrease of $20.000 units per month. Fixed expenses are $719.000 • D) increase of $160 D .Data concerning Kardas Corporation's single product appear below: Per Unit Percent of Sales Selling price $140 100% Variable expenses 28 20% Contribution margin $112 80% The company is currently selling 8.

000 Net operating income = $ 177.000 units.000 $ 177.000 229. $1.$177.000 $1.145.120.000 916.160 Increase in net operating income: $177.000 = $160 .120.000 739.200 Variable expenses : ($1.145.180 units Sales (8.200 × 20%) 224.040 Contribution margin = 896.Ans: D Solution: 8.160 Fixed expenses = 719.000.180 units × $140) $1. 8.000 units 8.160 .