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Principles of Accounting, Volume 2: Managerial Accounting

Chapter 3

Principles of Accounting, Volume 2: Managerial AccountingChapter 3

Chapter 3

Multiple Choice

1.

A

3.

C

5.

B

7.

C

9.

D

11.

B

13.

C

15.

C

17.

C

19.

D

21.

C

23.

D

Questions

1.

Answers will vary. Responses should include that per-unit contribution margin is the amount by which a product’s selling price exceeds it total variable cost per unit.

3.

Answers will vary. Responses should include that contribution income statements express total contribution margin for a given level of activity and can be useful in making decisions about product pricing and optimal levels of activity.

5.

Answers will vary. Responses should include the fact that the contribution margin ratio represents the percentage of every sales dollar available to cover fixed expenses. Businesses can use this ratio when projecting profit at various levels of sales revenue.

7.

Answers will vary. Responses should include a description of how the CVP analysis information can be brought into a projected income statement that takes into account additional revenues and expenses of the business to create a “big picture” of what happens as a result of a change in cost, volume, and profit

9.

Answers will vary. Responses should include the definition of sales mix as the relative proportions in which a company’s products are sold as well as a description of how products within the sales mix have unique sales prices, variable costs, and contribution margins.

11.

Answers will vary. Responses should include an explanation of how margin of safety allows the business to operate at a level where the risk of falling to or below the break-even point is low. There should also be some mention of the usefulness of the margin safety as an “alarm” for companies, such that when sales fall to the margin of safety level, action may be warranted.

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