Question

1. Which of the following differentiates direct fixed expenses from common fixed expenses?

The direct fixed expenses are those fixed costs that can be traced to a segment, whereas the common fixed expenses are not traceable to the segments.

The direct fixed expenses are linear revenue and linear cost functions that remain constant, whereas the common fixed expenses are profits and sales unit functions that change over a relevant range.

The direct fixed expenses are fixed costs that are the measures of profit, whereas the common fixed expenses are fixed costs that are the measures of revenue.

The direct fixed expenses are fixed costs which remain even if one of the segments is eliminated, whereas the common fixed expenses are fixed costs that would be avoided if a segment is eliminated.

2. Which of the following statements is true of sales mix?

It is the relative combination of inputs being purchased by a firm.

It is the relative combination of products being sold by a firm.

It is the relative combination of products being produced by a firm.

It is the relative combination of inputs being used by a firm.

3. A company manufactures two products. Information about the two product lines for the current year is as follows:

	Product A		Product B
Selling price per unit		$90		$120
Variable costs per unit		$50		$60

The company expects fixed costs to be $70,000. Calculate the break-even quantity of each product when the sales mix is 2:1.

1,145 units, 572 units

1,250 units, 625 units

1,110 units, 555 units

1,000 units, 500 units

4. The margin of safety in dollars is calculated by.

subtracting total cost from the actual sales.

subtracting the contribution margin from the actual sales.

subtracting the break-even sales from the actual sales.

subtracting the fixed cost from the actual sales.

5. Lauren Company plans to sell 3,000 units of a product at $500 each. For the product, unit variable cost is $380 and break-even units are 700. Calculate the margin of safety for Lauren in terms of the number of units.

2,000 units

2,100 units

2,200 units

2,300 units

6. Young Manufacturing Company plans to sell 600 units at $500 each in the following year. The data on costs is as follows:

Variable cost	$400
Total fixed cost	$47,000
Operating Income	$30,000

Calculate the degree of operating leverage.

3

2

4

1

Answer 1

Solution 1:

The direct fixed expenses are those fixed costs that can be traced to a segment, whereas the common fixed expenses are not traceable to the segments. This differentiates direct fixed expenses from common fixed expenses.

Hence first option is correct.

Solution 2:

Sales Mix is the relative combination of products being sold by a firm.

Hence second option is correct.

Solution 3:

Contribution Margin per unit Product A = $90- $50 = $40 per unit

Contribution Margin per unit Product B = $120- $60 = $60 per unit

Sales Mix = 2:1

Weighted Average Contribution Margin per unit = ($40*2/3) + ($60*1/3)

= 26.666667 + 20 = $46.666667

Break Even units = Fixed costs / Weighted Average Contribution Margin per unit = $70,000/ 46.666667 = 1500 units

Break even units Product A = 1500*2/3 = 1000 units

Break Even units Product B = 1500*1/3 = 500 units

Hence last option is correct.

Solution 4:

The margin of safety in dollars is calculated by subtracting the break-even sales from the actual sales.

Hence third option is correct.

Solution 5:

Margin of safety in terms of the number of units = Current sales units - Break even units = 3000 - 700 = 2,300 units

Hence last option is correct.

Solution 6:

Contribution margin = 600* ($500- $400) = 600*100 = $60,000

Operating Income = $30,000

Degree of operating Leverage = Contribution margin / Operating Income = $60,000 / $30,000 = 2

Hence second option "2" is correct.

Contribution Margin per unit Product A = $90- $50 = $40 per unit