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Contribution Margin MC Solution

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

Contribution Margin Main Page | CM Discussion Questions | Graduate MA Course

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.

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

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

b. 240,000

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

c. 256,000

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

a. 216,000

5. What is Sam’s contribution margin?

c. 360,000

6. The conventional linear break-even unit sales is

b. 12,000

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

b. 12,000

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

a. 4,000

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

b. 12,000

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

b. 320,000

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

a. 304,000

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

d. 344,000

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

e. all of these.

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

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

d. producing as much inventory as possible given the capacity constraints.

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

d. managers may have a tendency to ignore fixed costs.

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

b. fixed overhead allocations motivate managers to overproduce.

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

b. sales quantity equals the company’s capacity to produce and sell.

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

e. remain linear, but become steeper.

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

b. it promotes short run optimization rather than continuous improvement.

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

a. it violates the matching concept.

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

c. production volume is assumed to be the only cost driver.

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

b. it is useful for short run decisions such as special order, and does not discourage continuous improvement.

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

d. the matching concept is irrelevant for internal reporting.

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.

Contribution Margin MC Questions