Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
Contribution Margin Main Page | CM Discussion Questions
| Graduate MA Course
(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.
Contribution Margin MC Solution