Fixed vs. Variable Costs Quiz

QUESTIONS

1. The break-even point in accounting is...

        A) The point at which net profit equals $0

        B) The point at which net profit equals $1

 

2. Total variable costs will...

        A) Increase with the level of production

        B) Decrease with the level of production

 

3. Total fixed costs will...

        A) Increase with the level of production

        B) Remain the same regardless of the level of production

 

4. If two items are indirectly related, an increase in item A will lead to a(n)

        A) Decrease in item B

        B) Increase in item B

 

5. Fixed costs are more likely to be a part of...

        A) Cost of goods sold

        B) Selling, general and administrative expenses

 

6. A mixed cost...

        A) Is a type of cost that is neither variable nor fixed

        B) Is a type of cost that is considered both variable and fixed

 

7. The formula for calculating the contribution margin is...

        A) Sales - Variable Costs

        B) Sales - Fixed Costs

 

8. The formula for calculating the the contribution margin ratio...

        A) (Sales - Variable Costs) / Sales

        B) Variable Costs / Sales

 

9. Corporate salaries, factory rent, and depreciation are examples of...

        A) Variable costs

        B) Fixed costs

 

10. High fixed costs make it difficult to...

        A) Break-even

        B) Provide a suitable work environment

 

ANSWER KEY:

1A, 2A, 3B, 4A, 5B, 6B, 7A, 8A, 9B, 10A

 

PRACTICE PROBLEMS

1. A company produces 50,000 units and incurs $150,000 in variable costs and $210,000 in fixed costs. It plans to sell the units for $10 each. What is the company's variable cost per unit?

2. A company produces 50,000 units and incurs $150,000 in variable costs and $210,000 in fixed costs. It plans to sell the units for $10 each. What is the company's contribution margin? What is the company's contribution margin per unit?

3. A company produces 50,000 units and incurs $150,000 in variable costs and $210,000 in fixed costs. It plans to sell the units for $10 each. How many units must the company sell in order to break even?

4. A company produces 60,000 units and incurs $240,000 in variable costs and $320,000 in fixed costs. It plans to sell the units for $12 each. How many units must the company sell in order to break even?

5. A company produces 60,000 units and incurs $240,000 in variable costs and $320,000 in fixed costs. It plans to sell the units for $12 each. How many units must the company sell to achieve a profit of $100,000?

6. A company produces 50,000 units and incurs $150,000 in variable costs and $210,000 in fixed costs. It plans to sell the units for $10 each. What is the company's contribution margin ratio?

 

ANSWER KEY:

1: $150,000 / 50,000 = $3 per unit

 

2. Contribution Margin = Sales - Variable Costs

(50,000 x $10) - ($150,000) = $350,000

Contribution Margin Per Unit = Contribution Margin / # of Units

$350,000 / 50,000 = $7

OR Contribution Margin Per Unit = Sales Price Per Unit - Variable Cost Per Unit

$10 - $3 = $7

 

3. Break-even Point in Units = Fixed Costs / Contribution Margin Per Unit

X = $210,000 / $7 = 30,000

 

4. Variable Cost Per Unit = $240,000 / 60,000 = $4

Contribution Margin Per Unit = Sales Price Per Unit - Variable Cost Per Unit = $12 - $4 = $8

Break-even Point in Units = Fixed Costs / Contribution Margin Per Unit

X = $320,000 / $8 = 40,000

 

5. Revenues - Variable Costs - Fixed Costs = $100,000

Sales Price Per Unit (X Number of Units) - Variable Cost Per Unit (X Number of Units) - Fixed Costs = $100,000

$12X - $4X - $320,000 = $100,000

8X = $420,000

X = 52,500 Units

 

6. Contribution Margin = Sales - Variable Costs

CM = (50,000 x $10) - $150,000 = $350,000

CM Ratio = Contribution Margin / Sales

CM Ratio = $350,000 / $500,000 = 67%