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Managerial Accounting Chapter 2.3 (Contribution Margin Analysis

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Operating Income Equations
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Operating Income = Sales revenue – Total expenses Operating income = Sales revenue – Total variable expenses – Total fixed expenses Operating income = [(Sales price per – Variable cost per unit) x #of units sold] – fixed expenses
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Contribution Margin
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The difference between sales and variable costs—the amount that remains to cover fixed costs and provide a profit.
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Contribution Margin & Contribution margin per unit formulas
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Contribution margin = Sales revenue – Total variable expenses Contribution margin per unit = sales price per unit – Variable cost per unit
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Operating Income formula using contribution margin per unit
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[Contribution margin per unit x #of units sold] – Fixed Expenses
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Contribution Margin Ratio
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Contribution Margin ÷ Sales Revenue Contribution margin per unit ÷ Sales price per unit
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Contribution Format Income Statement
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An income statement that classifies costs by behavior
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Contribution Format Income Statement vs GAAP Income Statement
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Contribution Format Income statement helps managers predict the financial results of their decisions. It’s also based on cost behavior Meanwhile the GAAP Income statement doesn’t help to predict financial results, since it’s based on a cost function.
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Contribution Format Income Statement Example
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Variable Cost Ratio
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Total Variable Cost ÷ Total Sales
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The contribution margin is calculated as (a)Sales revenue − Cost of goods sold. (b)Sales revenue − Variable cost of goods sold. (c)Sales revenue − Total variable expenses. (d)Sales revenue − Total fixed expense
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C.
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The amount of net income presented on a functional income statement will be different from the amount of net income presented on a contribution format income statement. True or False?
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False Same
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Jenkins Jewelers operates with a 30% contribution margin. If Jenkins’s sales increase by $20,000, operating income will increase by Jenkins Jewelers operates with a 30% contribution margin. If Jenkins’s sales increase by $20,000, operating income will increase by (a)$6,000. (b)$10,000. (c)$14,000. (d)$20,000.
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A. ($20,000 x 30%)
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Restate the following income statement for a retailer in contribution margin format. Sales ($50 per unit) $5,000 Less cost of goods sold ($32 per unit) $3,200 Gross margin $1,800 Less operating expenses: Salaries $800 Advertising $400 Shipping ($2 per unit) $200 $1,400 Operating income $400
Restate the following income statement for a retailer in contribution margin format. Sales ($50 per unit)  $5,000  Less cost of goods sold ($32 per unit)  $3,200  Gross margin  $1,800  Less operating expenses:   Salaries $800   Advertising $400   Shipping ($2 per unit) $200 $1,400 Operating income    $400
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