If sales go up by 40%, which of the following will go up by 40%? A) fixed costs

ID: 2517784 • Letter: I

Question

If sales go up by 40%, which of the following will go up by 40%? A) fixed costs B) indirect costs. C) profit. D) contribution margin. 2 Operating leverage refers to the extent of using A) debts B) operating activities C) fixed costs D) inexpensive employees 3. If the degree of operating leverage is higher, which of the following is always true? A) It is the better for the company B) It is worse for the company C) Net income variability is the greater. D) Break-even point is lower. 4. A company's margin of safety is given as $100,000. Which of the following is true? A) The company's profit is $100,000 above the target profit. B) If the company's sales drop by less than $100,000, the company will still make a profit. C) The company's fixed expenses are $100,000 more than its variable expenses. D) The company's sales are $100,000 above the planned sales amount. Jones has a contribution margin ratio of 30%. This means that: A) contribution margin must be 70% of sales. B) fixed costs must be 30% of sales. . C) total costs must be 30% of sales. D) variable costs rnust be 70% of sales. 5, 6. If everything else stays the same, higher values are always desirable for? A) Contribution margin ratio B) Break-even point C) Operating leverage D) Unit variable expense . Hard: You can do other questions first] Last year Easton Company reported sales of $800,000, a contribution margin ratio of 30% and a net operating income of$60,000. Based on this information, the margin of safety was: A) $0 B) $180,000. C) $200,000. D) $240,000.

Explanation / Answer

1- D contribution margin because as the sales will increase by 40%, contribution margin will increase by the same percentage

2- C - Fixed cost - as the operating efficiency in the form of production capacity will be utilized to the maximum extent, fixed cost per unit would be reduced to the minimum

3- C - net income variability is the greater - because a higher degree of operating leverage means increase in sales results in more variability in operating income

4- B - if the company sales drop less than 100000 the company will still make a profit

margin of safety = level of sales- break even sales

5- D variable cost should be 70% of sales

sales-variable cost = contribution margin

100%-variable cost = 30%

variable cost = 100%-30% = 70%

6- A contribution margin ratio

sales

800000

variable cost

70% of sales

560000

contribution margin

240000

fixed cost

240000-60000

180000

net operating income

60000

Break even sales

180000/30%

600000

Margin of safety

sales level- break even sales

800000-600000

200000