Management And Accounting Web

# Contribution Margin MC Questions

Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

(Questions 1-12 are from MAAW's Textbook Chapter 12 Extra MC Questions)

1. The difference between absorption costing and variable (direct) costing is that

a. fixed manufacturing costs are capitalized in absorption costing, but not in variable costing.
b. all fixed costs are capitalized in absorption costing, but not in variable costing.
c. variable selling and administrative costs are capitalized in variable costing, but not in absorption costing.
d. a. and c.
e. b. and c.

Sam’s Toy Factory produces a small toy wagon. Sam’s results for the year are as follows:

 Wagons sold = 36,000 Wagons produced = 44,000 Sales price per wagon = \$20 Beginning inventories = 0 Direct material cost per wagon = \$5 Variable manufacturing cost (labor and overhead) per wagon = \$3 Variable selling and administrative cost per wagon = \$2 Total fixed costs per year = \$120,000 Fixed manufacturing cost per wagon = \$2 based on an annual capacity of 48,000 wagon.

2. Sam’s net income before taxes based on variable costing is

a. 216,000
b. 240,000
c. 256,000
d. 264,000
e. some other amount.

3. Sam’s net income before taxes based on absorption costing is

a. 216,000
b. 240,000
c. 256,000
d. 264,000
e. some other amount.

4. Sam’s net income before taxes based on throughput costing is

a. 216,000
b. 240,000
c. 256,000
d. 264,000
e. some other amount.

5. What is Sam’s contribution margin?

a. 240,000
b. 288,000
c. 360,000
d. 432,000
e. some other amount.

6. The conventional linear break-even unit sales is

a. 4,000
b. 12,000
c. 15,000
d. 19,385
e. some other amount.

7. The break-even unit sales based on variable costing is

a. 4,000
b. 12,000
c. 15,000
d. 19,385
e. some other quantity.

8. The break-even unit sales based on absorption costing is

a. 4,000
b. 12,000
c. 15,000
d. 19,385
e. some other quantity.

9. The break-even unit sales based on throughput costing is

a. 4,000
b. 12,000
c. 15,000
d. 19,385
e. some other quantity.

Now assume Sam company’s results for year two are the same as above except 44,000 wagons are sold and 36,000 wagons are produced.

10. Sam’s net income before taxes based on variable costing for the year 2 is

a. 304,000
b. 320,000
c. 328,000
d. 344,000
e. some other amount.

11. Sam’s net income before taxes based on absorption costing for the year 2 is

a. 304,000
b. 320,000
c. 328,000
d. 344,000
e. some other amount.

12. Sam’s net income before taxes based on throughput costing for the year 2 is

a. 304,000
b. 320,000
c. 328,000
d. 344,000
e. some other amount.

13. Which of the following represents an argument (or arguments) against the contribution margin approach?

a. It promotes overproduction.
b. It is based on the assumption that production output is the only cost driver.
c. It ignores the effects of product diversity and complexity on fixed costs.
d. b and c.
e. all of these.

14. Which of the following represents an argument (or arguments) in defense of the contribution margin approach?

a. Production output is the major cost driver.
b. The contribution margin approach is less likely to promote over production than absorption costing.
c. The contribution margin approach is easier for managers to understand than absorption costing.
d. a and c.
e. all of the above.

15. Assume that a company has a constant sales level of 10,000 units per period. Under absorption costing, net income will be maximized by

a. producing 10,000 good units per period.
b. producing 10,000 good units less any beginning inventory.
c. producing 10,000 good units plus any beginning inventory.
d. producing as much inventory as possible given the capacity constraints.
e. none of these.

16. The major behavioral problem associated with direct or variable costing is

a. overhead allocations cause distorted product costs.
b. fixed overhead allocations motivate managers to overproduce.
c. managers may have a tendency to ignore variable costs.
d. managers may have a tendency to ignore fixed costs.
e. none of these.

17. The major behavioral problem associated with absorption costing is that

a. overhead allocations cause distorted product costs.
b. fixed overhead allocations motivate managers to overproduce.
c. managers may have a tendency to ignore variable costs.
d. managers may have a tendency to ignore fixed costs.
e. none of these.

18. In the linear cost volume profit model, profit is maximized when

a. marginal cost equals marginal revenue.
b. sales quantity equals the company’s capacity to produce and sell.
c. unit cost is minimized.
d. production and sales capacity are balanced.
e. none of these.

19. In the linear cost volume profit model, when the price of an input such as labor increases by \$2 per hour, the variable cost function would

a. become nonlinear and steeper.
b. become non linear and u-shaped.
c. change, but the change would depend on whether the point of diminishing returns had been reached.
d. remain linear, but become less steep.
e. remain linear, but become steeper.

20. From the lean enterprise perspective, the contribution margin approach is criticized because

a. it violates the matching concept.
b. it promotes short run optimization rather than continuous improvement.
c. production volume is assumed to be the only cost driver.
d. it promotes a push rather than a pull system.
e. none of the above.

21. From the GAAP perspective, the contribution margin approach is criticized because

a. it violates the matching concept.
b. it promotes short run optimization rather than continuous improvement.
c. production volume is assumed to be the only cost driver.
d. it promotes a push rather than a pull system.
e. none of the above.

22. From the activity-based costing perspective, the contribution margin approach is criticized because

a. it violates the matching concept.
b. it promotes short run optimization.
c. production volume is assumed to be the only cost driver.
d. it promotes a push rather than a pull system.
e. none of the above.

23. A counter argument for contribution margin in response to the criticism from the lean enterprise perspective is

a. production volume is not the only cost driver, but it is the major cost driver.
b. it is useful for short run decisions such as special order, and does not discourage continuous improvement.
c. it is neutral in terms of production, rather than creating a bias toward overproduction.
d. the matching concept is irrelevant for internal reporting.
e. none of the above.

24. A counter argument for contribution margin in response to the criticism from the GAAP perspective is

a. production volume is not the only cost driver, but it is the major cost driver.
b. it is useful for short run decisions such as special order, and does not discourage continuous improvement.
c. it is neutral in terms of production, rather than creating a bias toward overproduction.
d. the matching concept is irrelevant for internal reporting.
e. none of the above.

25. A counter argument for contribution margin in response to the criticism from the activity-based costing perspective is

a. production volume is not the only cost driver, but it is the major cost driver.
b. it is useful for short run decisions such as special order, and does not discourage continuous improvement.
c. it is neutral in terms of production, rather than creating a bias toward overproduction.
d. the matching concept is irrelevant for internal reporting.
e. none of the above.