4. Once the break-even point is reached: A. the total contribution margin change
ID: 2524394 • Letter: 4
Question
4. Once the break-even point is reached: A. the total contribution margin changes from negative to positive. B. net operating income will increase by the unit contribution margin for each atinal item sold. C. variable expenses will remain constant in total. D. the contribution margin ratio begins to decrease. 5. Net operating income computed using variable costing would exced net operating income computed using absorption costing if: A. units sold exceed units produced. B. units sold are less than units produced. C. units sold equal units produced. D. the average fixed cost per unit is zero.Explanation / Answer
4.
Breakeven point is the production level where sales revenue and total expenses are indifferent.
At this level all the expenses are covered and there is no loss and no profit is observed. Beyond this point company start gaining money. Formula to calculate profit is:
Profit = Unit contribution margin x No. of units – Fixed expense
If fixed expense is covered,
Profit = Unit contribution margin x No. of units
After breakeven is achieve, supplementary sales unit provides a profit amount as equal to unit contribution margin.
Hence option “B” is correct answer.
5.
In variable costing method fixed manufacturing overhead is not included in product cost and charged to the income statement of the relevant period as entirely .So no segment of fixed cost is released by ending inventory. Whereas fixed manufacturing overhead is the part of ending inventory under absorption costing system. If unit sold exceeds unit produced, inventory decreases. Depleted inventory releases fixed manufacturing overhead cost, which in fact increases the burden of current period in case of absorption costing. A portion of fixed cost relates to last period is carry forwarded to the current period.
That’s why the net operating income under variable costing is higher than absorption costing when closing inventory is lower than opening inventory i.e. units sold go beyond the unit produced.
Hence option “A” is correct answer.
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