Question

Question 1

If a company has a contribution margin ratio of 60%, the company's variable expense ratio is:

Group of answer choices

100%

Cannot be determined with the given information

40%

60%

Question 2

To find the break-even point in units using the equation method, we set the profit equal to zero.

Group of answer choices

True

False

Question 3

The equation for target profit is the same for break-even point in dollars

Group of answer choices

True

False

Question 4

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. How many cups of coffee would have to be sold to attain target profits of $2,500 per month?

Group of answer choices

1,150 cups

3,363 cups

2,212 cups

4,200 cups

Question 5

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the margin of safety expressed in cups?

Group of answer choices

2,100 cups

950 cups

1,150 cups

3,250 cups

Answer 1

Question 1

If a company has a contribution margin ratio of 60%, the company's variable expense ratio is:

Group of answer choices

>100%

>Cannot be determined with the given information

>40%

>60%

.

Ans: 40%

.

contribution margin ratio = contribution margin / sales

And

variable expense ratio =variable expense / sales

contribution margin + variable expense = sales

So, Sales is 100%

contribution margin ratio of 60%

.variable expense ratio is: = 100 - 60 = 40%

.

Question 2

To find the break-even point in units using the equation method, we set the profit equal to zero.

Group of answer choices

True

False

.

Ans: True

Because, A company breaks even for a given period when sales and costs charged to that period are equal. Thus, the break-even point is that level of operations at which a company will get no profit or loss..

.

Equation is

Break-even units = Fixed cost / Contribution margin per units

So in break-even the contribution margin total is equal to fixed cost

.

Question 3

The equation for target profit is the same for break-even point in dollars

Group of answer choices

True

False

.

Ans: False

.

Equation for target profit is

Target profit in dollar = ( Fixed cost + Before tax target profit ) / contribution margin ratio

.

How ever the equation for break even dollar is:

break even point in dollar = Fixed cost / contribution margin ratio

.

Question 4

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. How many cups of coffee would have to be sold to attain target profits of $2,500 per month?

Group of answer choices

1,150 cups

3,363 cups

2,212 cups

4,200 cups

.

Target profit in units = ( Fixed cost + Before tax target profit ) / contribution margin per units

Where,

Fixed cost = 1300

Before tax target profit = $2500

contribution margin per units = selling price - variable cost

contribution margin per units = $1.49 - 0.36 = $1.13

.

Target profit in units =   ( 1300 + 2500 ) / 1.13

Target profit in units = 3800 / 1.13 = 3362.83 = 3363 units

.

Ans: 3,363 cups

.

Question 5

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49 and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the margin of safety expressed in cups?

Group of answer choices

2,100 cups

950 cups

1,150 cups

3,250 cups

.

Margin of safety in units= Sold units - break-even units

Or

Margin of safety in units= profit / contribution margin per units

.

We use first equation

Where,

Sold units = 2100

Break-even-points in units = Fixed cost / contribution margin per units

Fixed cost = 1300

contribution margin per units = selling price - variable cost

contribution margin per units = $1.49 - 0.36 = $1.13

Break-even-points in units = 1300 / 1.13 = 1150 cups

.

Margin of safety in Cups = 2100 - 1150 =   950

Ans: 950 cups

.

In another way

Margin of safety in units= profit / contribution margin per units

profit = sales - variable cost - fixed cost

sales - variable cost = contribution margin per units * units sold

Total contribution margin = 1.13 * 2100 = 2373

Less fixed cost = 1300

Profit = 2373 - 1300 = 1073

.

Margin of safety in Cups = 1073 / 1.13 = 950 cups