Case StudyThe 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 • B) $100.000 Margin of safety $100.000 • C) $200.000 • D) $225.000 • D .Hopi Corporation expects the following operating results for next year: Sales $400.000 Contribution margin ratio 75% Degree of operating leverage 4 What is Hopi expecting total fixed expenses to be next year? • A) $75. we will have: $400.Ans: D • Solution: Current sales .000 Breakeven sales = $300.Breakeven sales = Margin of safety Substituting the given information into the above equation.000 .000 − Breakeven sales = $100.75 Fixed expenses = $225.000 = Fixed expenses ÷ 0. we will have: $300.000 Breakeven sales = Fixed expenses ÷ Contribution margin ratio Substituting the given information into the above equation. its total contribution margin should be closest to: • A) $301.200 units.600 • C) $319.000 • B) $311.300 If the company sells 8. The company produces and sells a single product.200 • D) $66.Escareno Corporation has provided its contribution format income statement for June.200 Contribution margin 319.900 Net operating income $ 68.400 Variable expenses 445. Sales (8.674 • B .400 units) $764.200 Fixed expenses 250. 200 ÷ 8.400 = $38 contribution margin per unit If 8. .200 units are sold.Ans: B Solution: Current contribution margin ÷ Current sales in units = Contribution margin per unit $319.200 × $38. the total contribution margin will be 8. or $311.600. 000 Contribution margin 40.000 Fixed expenses 35.000 Variable expenses 60.00 • D) $12.00 • C) $150.The Bronco Birdfeed Company reported the following information: Sales (400 cases) $100.000 Net operating income $5.000 How much will the sale of one additional case add to Bronco's net operating income? • A) $250.50 • B .00 • B) $100. 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 • D) $16.000 and its variable expenses are $80.000 • B . its fixed expenses must be: • A) $8. If the company's sales are $120.The margin of safety in the Flaherty Company is $24.000 • B) $32.000.000 • C) $24.000. 000 = $40. we will have: $120.Variable expenses = Contribution margin $120.000 ÷ $120.Breakeven sales = Margin of safety Substituting the given information into the above equation.000 Contribution margin ratio = 0.Breakeven sales = $24.000 = Fixed costs ÷ 0. we will have: $96.33333 Fixed costs = $32.$80.Ans: B Solution: Current sales .000 Breakeven sales = $96.000 .000 .33333 Breakeven sales = Fixed costs ÷ Contribution margin ratio Substituting the given information into the above equation.000 .000 Contribution margin ratio = Contribution margin ÷ Sales Contribution margin ratio = $ 40.000 Sales . and C are all correct.000 per month. and variable expenses are $60 per unit. Fixed expenses total $12. The company's sales average 500 units per month.000 per month. B. C) The company's contribution margin ratio is 40%.• Dodero Company produces a single product which sells for $100 per unit. Which of the following statements is correct? A) The company's break-even point is $12. C . B) The fixed expenses remain constant at $24 per unit for any activity level within the relevant range. D) Responses A. Variable expenses per unit • = $100 .$60 = $40 • Contribution margin ratio = Contribution margin per unit ÷ Selling price per unit • Contribution margin ratio = $40 ÷ $100 • Contribution margin ratio = 40% .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 .Ans: C Solution: Answer A is not correct because: • Sales = Variable expenses + Fixed expenses + Profit • $100Q = $60Q + $12.000 • Q = $12.000 ÷ $40 per unit = 300 units • 300 units × $100 selling price per unit = $30.000 + $0 • $40Q = $12. the degree of operating leverage will be: • A) 12 • B) 10 • C) 6 • D) 4 D . the degree of operating leverage is 10. If sales increase by $60. At a $300.000.Holt Company's variable expenses are 70% of sales.000 sales level. 000 Net operating income $ 27.000 ÷ 10 = $9.000 Fixed expenses = $90.000 Degree of operating leverage = Contribution margin ÷ Net operating income = $108.000 Variable expenses ($360.000) $360.000 = $81.000 × 70%) 210.000 .000 ÷ Current net operating income Current net operating income = $90.000 Contribution margin = Fixed expenses .000 Sales ($300.000 Fixed expenses ? Net operating income $ ? Current degree of operating leverage = Current contribution margin ÷ Current net operating income 10 = $90.000 + $60.$9.000 Fixed expenses 81.Ans: D Solution: Sales $300.000 = Fixed expenses .000/$27.$9.Net operating income $90.000 = 4.000 × 70%) 252.000 Contribution margin 90.000 Contribution margin 108.0 .000 Variable expenses ($300. • A) $565.440 • B) $654.560 D .000 • C) $88. what is the best estimate of the company's net operating income? Assume that the fixed monthly expenses do not change.Gayne Corporation's contribution margin ratio is 12% and its fixed monthly expenses are $84. If the company's sales for a month are $738.560 • D) $4.000.000. 560 Fixed expenses 84.000 × 88%) 649.440 Contribution margin ($738.Ans: D Solution: Sales $738.000 × 12%) 88.000 Net operating income $ 4.000 Variable expenses ($738.560 . 000 C .000 • C) $205. Assuming that these changes are incorporated in its budget. what should be the budgeted net operating income? • A) $175.000 Variable expenses $600.000 Fixed expenses $300.000 Based on a market study.Wilson Company prepared the following preliminary budget assuming no advertising expenditures: Selling price $10 per unit Unit sales 100.000 • D) $365.000 • B) $190. 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 Net operating income $ 205.000 + $100.000 = $6 variable expense per unit .265.50) $1.000 units × $6*) 660.000 units × $11.000 Fixed expenses ($300.Ans: C Solution: Sales (110.000) 400.000 * Current variable expenses ÷ Current sales in units = Variable expense per unit $600.000 Variable expenses (110.000 ÷ 100.00 Contribution margin 605. 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 per month.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. Fixed expenses are $719.160 • C) decrease of $20.000 units per month.000 increase in the monthly advertising budget would result in a 180 unit increase in monthly sales.000 • D) increase of $160 D . 000 Net operating income = $ 177.180 units × $140) $1.000 739.000 916.000 $1.040 Contribution margin = 896.145.200 Variable expenses : ($1.000 = $160 .000 units.160 .180 units Sales (8.Ans: D Solution: 8.120.000 units 8.200 × 20%) 224.000.120.160 Fixed expenses = 719. $1. 8.145.000 229.160 Increase in net operating income: $177.$177.000 $ 177.