Cost Accounting Quiz: Contribution Margin
20 questions · exam conditions
0:00
Contribution MarginQuestion 1 of 20

Last year, a company generated $1,500,000 in sales and reported net operating income of $120,000. This year, sales grew by 20%, and net operating income increased to $240,000. Total fixed costs did not change between the two years.

What is the company's contribution margin ratio?

8.0%
13.3%
40.0%
50.0%
← Back to quizzes

Cost Accounting Quiz

Cost Accounting Quiz: Contribution Margin

Practice Contribution Margin in Cost Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Contribution Margin, giving you a quick way to practice the rules, question types, and explanations that matter most for Cost Accounting.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Last year, a company generated $1,500,000 in sales and reported net operating income of $120,000. This year, sales grew by 20%, and net operating income increased to $240,000. Total fixed costs did not change between the two years.

What is the company's contribution margin ratio?

  1. 8.0%
  2. 13.3%
  3. 40.0% (correct answer)
  4. 50.0%
Explanation: When fixed costs are constant, the change in net operating income is equal to the change in contribution margin. The contribution margin ratio can be calculated by dividing the change in contribution margin by the change in sales.
  1. Calculate the change in sales: Change in Sales = $1,500,000 * 20% = $300,000.
  2. Calculate the change in net operating income (which equals the change in contribution margin): Change in Contribution Margin = $240,000 - $120,000 = $120,000.
  3. Calculate the contribution margin ratio (CMR): CMR = Change in Contribution Margin / Change in Sales = $120,000 / $300,000 = 0.40 or 40%.

Question 2

A manufacturing company's budget for the upcoming year includes the following data for its sole product:

  • Sales (10,000 units): $500,000
  • Total Costs: $420,000
  • Fixed Costs: $150,000

Based on the company's budget, what is the contribution margin ratio?

  1. 16.0%
  2. 26.0%
  3. 46.0% (correct answer)
  4. 70.0%
Explanation: The contribution margin ratio is calculated as (Sales - Variable Costs) / Sales.
  1. First, determine the total variable costs. Total Costs = Fixed Costs + Variable Costs. Therefore, Variable Costs = Total Costs - Fixed Costs. Variable Costs = $420,000 - $150,000 = $270,000.
  2. Next, calculate the total contribution margin. Contribution Margin = Sales - Variable Costs. Contribution Margin = $500,000 - $270,000 = $230,000.
  3. Finally, calculate the contribution margin ratio. Contribution Margin Ratio = $230,000 / $500,000 = 0.46, or 46.0%.

Question 3

Zenon Corp. sells a single product for $80 per unit. For the most recent month, the company sold 5,000 units and reported a total contribution margin of $150,000. Management anticipates that sales will increase to 5,500 units next month.

Assuming the cost structure remains unchanged, what is the expected increase in total contribution margin for next month compared to the most recent month?

  1. $15,000 (correct answer)
  2. $30,000
  3. $165,000
  4. $180,000
Explanation: The question asks for the increase in total contribution margin, not the new total.
  1. First, calculate the unit contribution margin (UCM). UCM = Total Contribution Margin / Units Sold. UCM = $150,000 / 5,000 units = $30 per unit.
  2. Next, determine the increase in sales volume. Increase in units = 5,500 units - 5,000 units = 500 units.
  3. Calculate the total increase in contribution margin by multiplying the increase in units by the UCM. Increase in Total CM = 500 units * $30/unit = $15,000.

Question 4

A company requires $800,000 in sales to meet its target net income of $105,000 after-tax. The company's tax rate is 30% and its total fixed costs are $250,000.

What is the company's total contribution margin at the target sales level?

  1. $150,000
  2. $355,000
  3. $400,000 (correct answer)
  4. $450,000
Explanation: The total contribution margin must cover both fixed costs and the pre-tax target profit.
  1. First, convert the after-tax net income target to a pre-tax income target. Pre-tax Income = After-Tax Income / (1 - Tax Rate). Pre-tax Income = $105,000 / (1 - 0.30) = $105,000 / 0.70 = $150,000.
  2. Next, use the profit formula: Total Contribution Margin = Fixed Costs + Pre-tax Profit. Total Contribution Margin = $250,000 + $150,000 = $400,000.

Question 5

Marigold Inc. reported a break-even point of $600,000 in annual sales. The company's total fixed costs for the year were $240,000. The company is currently operating with a sales level of $750,000.

What is the total contribution margin at the current sales level of $750,000?

  1. $60,000
  2. $240,000
  3. $300,000 (correct answer)
  4. $510,000
Explanation: This is a two-step problem. First, find the contribution margin ratio using the break-even data, then apply it to the current sales level.
  1. Calculate the contribution margin ratio (CMR). At the break-even point, Total Contribution Margin = Total Fixed Costs. The formula for break-even sales is Fixed Costs / CMR. CMR = Fixed Costs / Break-even Sales = $240,000 / $600,000 = 0.40 or 40%.
  2. Use the CMR to calculate the total contribution margin at the current sales level. Total Contribution Margin = Current Sales * CMR = $750,000 * 0.40 = $300,000.

Question 6

A product sells for $150 per unit and has a contribution margin ratio of 30%. If the selling price is increased by $15 per unit, and the variable cost per unit and total units sold remain unchanged, what will be the new unit contribution margin?

  1. $49.50
  2. $52.50
  3. $60.00 (correct answer)
  4. $115.50
Explanation: An increase in selling price, with no change in variable cost per unit, directly increases the unit contribution margin by the same amount.
  1. Calculate the original unit contribution margin (UCM). Original UCM = Selling Price * CMR = $150 * 0.30 = $45.
  2. Alternatively, one could calculate the original variable cost per unit. Variable Cost = Selling Price * (1 - CMR) = $150 * 0.70 = $105. Original UCM = $150 - $105 = $45.
  3. Calculate the new unit contribution margin. The new selling price is $150 + $15 = $165. The variable cost per unit is still $105. New UCM = New Selling Price - Variable Cost per Unit = $165 - $105 = $60.

Question 7

Barth Co. manufactures a product with the following per-unit costs at a production level of 20,000 units:

  • Direct materials: $25
  • Direct labor: $18
  • Variable manufacturing overhead: $7

Total fixed manufacturing overhead is $160,000, and total fixed selling and administrative expenses are $100,000. Variable selling expenses are $5 per unit sold. The product's selling price is $90.

What is the unit contribution margin for the product?

  1. $35 (correct answer)
  2. $27
  3. $40
  4. $22
Explanation: The unit contribution margin is the selling price per unit minus all variable costs per unit (both manufacturing and selling).
  1. Sum the variable costs per unit:
    • Direct materials: $25
    • Direct labor: $18
    • Variable manufacturing overhead: $7
    • Variable selling expenses: $5 Total Variable Cost per Unit = $25 + $18 + $7 + $5 = $55.
  2. Calculate the unit contribution margin (UCM): UCM = Selling Price per Unit - Total Variable Cost per Unit = $90 - $55 = $35.
Fixed costs are not used in the calculation of contribution margin.

Question 8

A company is considering an investment in new machinery that would reduce its variable direct labor cost by $5 per unit but increase its annual fixed costs by $90,000. Last year, the company's total contribution margin was $400,000 on sales of 25,000 units.

If the company had made this investment at the beginning of last year and sales volume had remained at 25,000 units, what would the total contribution margin have been?

  1. $310,000
  2. $435,000
  3. $495,000
  4. $525,000 (correct answer)
Explanation: The change in contribution margin is driven solely by the change in variable costs. The increase in fixed costs does not affect the contribution margin.
  1. The reduction in variable cost per unit directly increases the unit contribution margin by the same amount ($5 per unit).
  2. Calculate the total increase in contribution margin for the given sales volume. Total Increase in CM = Increase in UCM * Units Sold = $5/unit * 25,000 units = $125,000.
  3. Add this increase to the original total contribution margin to find the new total. New Total CM = Original Total CM + Total Increase in CM = $400,000 + $125,000 = $525,000.

Question 9

A company currently pays its sales team fixed salaries totaling $400,000 per year. The company is evaluating a new compensation plan that would consist of total fixed salaries of $100,000 plus a commission of 8% on all sales. The company sells 50,000 units annually at a price of $50 per unit, and the variable manufacturing cost per unit is $20.

If the new compensation plan is adopted and sales volume remains unchanged, what would be the company's total contribution margin?

  1. $1,300,000 (correct answer)
  2. $1,500,000
  3. $1,200,000
  4. $1,100,000
Explanation: The new commission is a variable cost that reduces the contribution margin per unit.
  1. First, calculate the new variable commission cost per unit. The sales price is $50. Commission per unit = $50 * 8% = $4.
  2. Next, calculate the new total variable cost per unit. New Total VC per unit = Variable Manufacturing Cost + Commission = $20 + $4 = $24.
  3. Calculate the new unit contribution margin (UCM). New UCM = Selling Price - New Total VC per unit = $50 - $24 = $26.
  4. Finally, calculate the new total contribution margin for the 50,000 units sold. New Total CM = New UCM * Units Sold = $26 * 50,000 = $1,300,000.

Question 10

A company's product has variable costs that are 75% of its selling price. The company's fixed costs are $300,000. The company wishes to earn a pre-tax profit that is 10% of total sales dollars.

What amount of total contribution margin must be generated to achieve the target profit?

  1. $375,000
  2. $500,000 (correct answer)
  3. $750,000
  4. $2,000,000
Explanation: This problem can be solved by setting up the CVP formula algebraically.
  1. Define the relationships:
    • Contribution Margin Ratio (CMR) = 1 - Variable Cost Ratio = 1 - 0.75 = 0.25.
    • Total Contribution Margin (TCM) = Sales * CMR = Sales * 0.25.
    • Target Profit = Sales * 0.10.
    • Sales = Fixed Costs + Target Profit + Variable Costs, OR TCM = Fixed Costs + Target Profit.
  2. Substitute the expressions into the last formula: Sales * 0.25 = $300,000 + (Sales * 0.10).
  3. Solve for Sales: (Sales * 0.25) - (Sales * 0.10) = $300,000. Sales * 0.15 = $300,000. Sales = $300,000 / 0.15 = $2,000,000.
  4. The question asks for the total contribution margin, not the sales. Calculate the total contribution margin at this sales level: Total Contribution Margin = Sales * CMR = $2,000,000 * 0.25 = $500,000.

Question 11

Delta Division has a degree of operating leverage of 4.0 at its current sales level of $1,000,000. The division's net operating income at this sales level is $80,000.

What is the division's total contribution margin?

  1. $20,000
  2. $240,000
  3. $320,000 (correct answer)
  4. $400,000
Explanation: The degree of operating leverage (DOL) is the ratio of contribution margin to net operating income.
  1. Recall the formula for DOL: DOL = Contribution Margin / Net Operating Income.
  2. Rearrange the formula to solve for Contribution Margin: Contribution Margin = DOL * Net Operating Income.
  3. Substitute the given values into the formula: Contribution Margin = 4.0 * $80,000 = $320,000.

Question 12

A company's net operating income is $60,000. The margin of safety in dollars is $200,000.

What is the company's contribution margin ratio?

  1. 25.0%
  2. 30.0% (correct answer)
  3. 33.3%
  4. 40.0%
Explanation: There is a direct relationship between net operating income (NOI), the margin of safety in dollars (MOS$), and the contribution margin ratio (CMR).
  1. The formula linking these three items is: Net Operating Income = Margin of Safety ($) * Contribution Margin Ratio.
  2. Rearrange the formula to solve for the CMR: CMR = Net Operating Income / Margin of Safety ($).
  3. Substitute the given values: CMR = $60,000 / $200,000 = 0.30 or 30%.

Question 13

A company sells two products, Alpha and Beta. Relevant data for the period are:

  • Product Alpha: 4,000 units sold, Sales price $100, Variable cost $65
  • Product Beta: 6,000 units sold, Sales price $120, Variable cost $90

What is the total contribution margin for the company for the period?

  1. $140,000
  2. $180,000
  3. $320,000 (correct answer)
  4. $325,000
Explanation: The total contribution margin is the sum of the contribution margins from all products.
  1. Calculate the contribution margin for Product Alpha:
    • Unit Contribution Margin (UCM) Alpha = $100 - $65 = $35.
    • Total CM Alpha = $35/unit * 4,000 units = $140,000.
  2. Calculate the contribution margin for Product Beta:
    • UCM Beta = $120 - $90 = $30.
    • Total CM Beta = $30/unit * 6,000 units = $180,000.
  3. Sum the total contribution margins for both products:
    • Total Company CM = Total CM Alpha + Total CM Beta = $140,000 + $180,000 = $320,000.

Question 14

For the upcoming month, a company has budgeted sales of 5,000 units at a price of $40 per unit. Variable costs are budgeted at $22 per unit. Fixed costs are budgeted at $60,000 for volumes up to 6,000 units. Due to a new marketing effort, the company actually sells 5,800 units.

What is the total contribution margin for the month based on actual sales?

  1. $44,400
  2. $90,000
  3. $104,400 (correct answer)
  4. $116,000
Explanation: Total contribution margin depends on the unit contribution margin and the actual number of units sold. The information about budgeted sales and the fixed cost structure is extraneous to this specific calculation.
  1. First, calculate the unit contribution margin (UCM): UCM = Selling Price - Variable Cost per Unit = $40 - $22 = $18.
  2. Next, multiply the UCM by the actual number of units sold to find the total contribution margin: Total Contribution Margin = UCM * Actual Units Sold = $18 * 5,800 = $104,400.

Question 15

An income statement prepared using a traditional format for a retail company is provided below:

  • Sales: $1,200,000
  • Cost of Goods Sold: $750,000
  • Gross Margin: $450,000
  • Selling & Administrative Expenses: $300,000
  • Net Operating Income: $150,000

Further analysis reveals that 40% of the Cost of Goods Sold is fixed, while 60% of the Selling & Administrative Expenses are variable.

What is the company's total contribution margin?

  1. $450,000
  2. $570,000 (correct answer)
  3. $630,000
  4. $720,000
Explanation: Contribution margin is Sales minus all variable costs. The costs must be reclassified from the traditional format.
  1. Calculate variable Cost of Goods Sold (COGS): Variable COGS = $750,000 * (1 - 0.40) = $750,000 * 0.60 = $450,000.
  2. Calculate variable Selling & Administrative (S&A) Expenses: Variable S&A = $300,000 * 0.60 = $180,000.
  3. Calculate total variable costs: Total Variable Costs = Variable COGS + Variable S&A = $450,000 + $180,000 = $630,000.
  4. Calculate total contribution margin: Total Contribution Margin = Sales - Total Variable Costs = $1,200,000 - $630,000 = $570,000.

Question 16

At a sales level of 8,000 units, a company has total sales of $400,000, total variable costs of $240,000, and total fixed costs of $100,000. Management is considering an advertising campaign that would increase fixed selling costs by $20,000 and is expected to increase sales by 10%.

If the advertising campaign is implemented, what is the expected total contribution margin?

  1. $160,000
  2. $176,000 (correct answer)
  3. $180,000
  4. $200,000
Explanation: The change in fixed costs affects net income but not the contribution margin ratio. The new total contribution margin will be based on the new sales level.
  1. First, calculate the current contribution margin ratio (CMR). Current Total CM = $400,000 - $240,000 = $160,000. CMR = $160,000 / $400,000 = 0.40 or 40%.
  2. Next, calculate the new expected sales level. New Sales = $400,000 * (1 + 0.10) = $440,000.
  3. Calculate the new total contribution margin by applying the stable CMR to the new sales level. New Total CM = New Sales * CMR = $440,000 * 0.40 = $176,000.

Question 17

A company is considering a special order for 2,000 units of its product at a price of $40 per unit. The product normally sells for $60 per unit. The company's unit costs at its current activity level of 10,000 units are as follows:

  • Direct Materials: $15
  • Direct Labor: $10
  • Variable Manufacturing Overhead: $5
  • Fixed Manufacturing Overhead: $8
  • Variable Selling Expenses: $4

Accepting the order will not affect regular sales, but it will require a special tool costing $5,000.

What would be the effect on the company's total contribution margin if the special order is accepted?

  1. An increase of $7,000
  2. An increase of $12,000
  3. An increase of $25,000
  4. An increase of $20,000 (correct answer)
Explanation: The effect on total contribution margin is determined by the contribution margin generated by the special order. The $5,000 tool cost is a fixed cost that affects profit but not contribution margin. Variable selling expenses are typically avoided on special orders as they don't go through normal sales channels.
  1. Identify relevant variable costs per unit for the order: Direct Materials (15)+DirectLabor(15) + Direct Labor (10) + Variable Manufacturing Overhead ($5) = $30.
  2. Calculate the unit contribution margin for the special order: Special Price (40)−RelevantVariableCosts(40) - Relevant Variable Costs (30) = $10.
  3. Calculate the total increase in contribution margin: UCM ($10) × Units (2,000) = $20,000.

Question 18

Epsilon Corporation produces specialty electronics with the following monthly data: sales volume of 8,000 units, selling price of $150 per unit, total variable costs of $720,000, and total fixed costs of $360,000.

Based on the data in the passage above, if Epsilon wants to achieve a target contribution margin ratio of 45% while keeping the same sales volume, and variable costs cannot be reduced, what new selling price per unit would be required?

  1. $163.64 calculated by applying the target ratio to current variable costs per unit (correct answer)
  2. $180.00 determined by proportionally adjusting from the current contribution margin ratio
  3. $156.25 derived from incorrectly treating fixed costs as part of the calculation basis
  4. $175.50 calculated by adding the required contribution increase to the current selling price
Explanation: Current variable cost per unit = $720,000 ÷ 8,000 = $90. If the contribution margin ratio should be 45%, then variable costs represent 55% of the selling price. Therefore: $90 ÷ 0.55 = $163.64 per unit. This can be verified: contribution margin = $163.64 - $90 = $73.64, and ratio = $73.64 ÷ $163.64 = 45%.

Question 19

Delta Enterprises operates with a contribution margin ratio of 35% and monthly fixed costs of $140,000. If the company achieves its target net income of $28,000 for the month, and then decides to increase advertising spending by $15,000 while maintaining the same net income level, what total contribution margin will be required?

  1. $168,000 representing the original required contribution margin without advertising adjustment
  2. $183,000 to cover increased fixed costs while maintaining target net income levels (correct answer)
  3. $173,000 by incorrectly spreading the advertising cost impact across contribution calculations
  4. $195,000 by incorrectly treating advertising as a percentage of contribution margin rather than fixed cost
Explanation: Original required contribution margin = Fixed costs + Target net income = $140,000 + $28,000 = $168,000. With the additional $15,000 advertising expense (increasing fixed costs to $155,000), the new required contribution margin = $155,000 + $28,000 = $183,000. The contribution margin must increase by exactly the amount of the additional fixed cost to maintain the same net income.

Question 20

Alpha Manufacturing produces widgets with a selling price of $45 per unit. Variable costs are $28 per unit, and monthly fixed costs are $85,000. If the company currently sells 6,000 units per month but plans to increase advertising expenses by $12,000 monthly (which will increase fixed costs), what will be the new contribution margin ratio after this change?

  1. 37.78% based on the original cost structure without considering the advertising increase
  2. 35.42% after incorrectly treating advertising as a variable cost per unit
  3. 38.89% after miscalculating the impact of fixed cost changes on the ratio
  4. 37.78% since the contribution margin ratio remains unchanged by fixed cost increases (correct answer)
Explanation: The contribution margin ratio is calculated as (Selling Price - Variable Cost per Unit) ÷ Selling Price = ($45 - $28) ÷ $45 = $17 ÷ $45 = 37.78%. The contribution margin ratio is unaffected by changes in fixed costs because it only considers the relationship between selling price and variable costs per unit. The $12,000 increase in advertising is a fixed cost change and does not alter the per-unit contribution margin or ratio.