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Chapter 18 Review Questions 1.

If a company increases advertising by $500,000, this will cause net operating income to increase if the resulting increase in sales dollars is: A. exactly $500,000. B. greater than $500,000 divided by the percentage increase in advertising. C. greater than $500,000 divided by the degree of operating leverage. D. greater than $500,000 divided by the contribution margin ratio.

2. Which of the following is true regarding the contribution margin ratio of a single product company? A. As fixed expenses decrease, the contribution margin ratio increases. B. The contribution margin ratio multiplied by the variable expense per unit equals the contribution margin per unit. C. If sales increase, the dollar increase in net operating income can be computed by multiplying the contribution margin ratio by the dollar increase in sales. D. The contribution margin ratio increases as the number of units sold increases. 3. The ratio of fixed expenses to the unit contribution margin is the: A. break-even point in unit sales. B. profit margin. C. contribution margin ratio. D. margin of safety. 4. The margin of safety is equal to: A. Sales - Net operating income. B. Sales - (Variable expenses/Contribution margin). C. Sales - (Fixed expenses/Contribution margin ratio). D. Sales - (Variable expenses + Fixed expenses).

5. Last year, Twins Company reported $750,000 in sales (25,000 units) and a net operating income of $25,000. At the break-even point, the company's total contribution margin equals $500,000. Based on this information, the company's: A. contribution margin ratio is 40%. B. break-even point is 24,000 units. C. variable expense per unit is $9. D. variable expenses are 60% of sales. Solve backwards for contribution margin and then variable costs:

*Given **At the break-even point, fixed expenses = contribution margin, so we know that fixed costs are $500,000. Before going any further, it can be seen that variable expense per unit is $9. 6. A company has provided the following data:

If the dollar contribution margin per unit is increased by 10%, total fixed cost is decreased by 20%, and all other factors remain the same, net operating income will: A. increase by $61,000. B. increase by $20,000. C. increase by $3,500. D. increase by $11,000.

7. At a break-even point of 400 units sold, variable expenses were $4,000 and fixed expenses were $2,000. What will the 401st unit sold contribute to profit? A. $0 B. $5 C. $10 D. $15 Break-even point (units) = Fixed expenses Contribution margin per unit Substituting: 400 = $2,000 Contribution margin per unit Contribution margin per unit = $5 8. Litke Corporation, a company that produces and sells a single product, has provided its contribution format income statement for February.

If the company sells 5,100 units, its net operating income should be closest to: A. $15,600 B. $11,700 C. $8,400 D. $14,733

Current sales dollars Current sales in units = Sales price per unit $129,600 5,400 = $24 sales price per unit Current variable expenses Current sales in units = Variable expense per unit $59,400 5,400 = $11 variable expense per unit