Managerial Accounting Quiz: Contribution Margin
20 questions · exam conditions
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Contribution MarginQuestion 1 of 20

A company reports the following data: Sales revenue of $800,000, variable costs of $480,000, and fixed costs of $200,000.

If the company's variable costs per unit decrease by 10%, but the selling price and fixed costs remain unchanged, what will be the new total contribution margin?

$320,000
$352,000
$368,000
$288,000
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Managerial Accounting Quiz

Managerial Accounting Quiz: Contribution Margin

Practice Contribution Margin in Managerial 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 Managerial Accounting.

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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

A company reports the following data: Sales revenue of $800,000, variable costs of $480,000, and fixed costs of $200,000.

If the company's variable costs per unit decrease by 10%, but the selling price and fixed costs remain unchanged, what will be the new total contribution margin?

  1. $320,000
  2. $352,000
  3. $368,000 (correct answer)
  4. $288,000
Explanation: The correct answer is $368,000. First, calculate the original total contribution margin: $800,000 (Sales) - $480,000 (Variable Costs) = $320,000. Next, calculate the new total variable costs. The variable costs decrease by 10%: $480,000 \times 10% = $48,000. The new variable costs will be $480,000 - $48,000 = $432,000. The new total contribution margin is calculated as Sales - New Variable Costs: $800,000 - $432,000 = $368,000. Distractor A is the original contribution margin. Distractor B results from increasing the original CM by 10% ($320,000 * 1.1), which is incorrect. Distractor D incorrectly decreases the original CM by 10% ($320,000 * 0.9).

Question 2

A company is planning to increase its advertising budget, which is a fixed cost. This is expected to increase the number of units sold. To maintain the current level of operating income, the required increase in total contribution margin must be:

  1. greater than the increase in advertising costs.
  2. less than the increase in advertising costs.
  3. equal to the increase in advertising costs. (correct answer)
  4. equal to the original total fixed costs.
Explanation: The correct answer is that the increase in total contribution margin must be equal to the increase in advertising costs. The profit equation is Operating Income = Total Contribution Margin - Total Fixed Costs. If operating income is to remain constant, any change in fixed costs must be exactly offset by an equal change in total contribution margin. Therefore, to cover the increased fixed advertising cost, the total contribution margin must increase by the same amount.

Question 3

A company sells a product for $150 per unit. The variable costs are $90 per unit, and the fixed costs are $720,000.

The company wants to achieve a target operating income of $100,000. Management believes that increasing the advertising budget by $50,000 will allow them to reach this target. How many units must the company sell to achieve the target operating income under these new conditions?

  1. 12,000 units
  2. 14,000 units
  3. 14,500 units (correct answer)
  4. 12,833 units
Explanation: The correct answer is 14,500 units. The formula for target sales in units is (Fixed Costs + Target Operating Income) / Contribution Margin per Unit. First, calculate the contribution margin per unit: $150 - $90 = $60. Next, determine the new total fixed costs, which includes the additional advertising: $720,000 + $50,000 = 770,000.Nowapplytheformula:(770,000. Now apply the formula: (770,000 + $100,000) / $60 = $870,000 / 60=14,500units.DistractorA(12,000)representstheoriginalbreak−evenpoint(60 = 14,500 units. Distractor A (12,000) represents the original break-even point (720,000 / $60). Distractor B (14,000) represents the units needed for the target income before the advertising increase.

Question 4

A company that sells a single product has a contribution margin per unit of $12. The company's monthly fixed expenses are $84,000. The company is currently selling 8,000 units per month.

What is the company's margin of safety in units?

  1. 7,000 units
  2. 12,000 units
  3. 8,000 units
  4. 1,000 units (correct answer)
Explanation: The correct answer is 1,000 units. The margin of safety is the difference between current sales and break-even sales. First, calculate the break-even point in units: Break-Even Units = Fixed Expenses / Contribution Margin per Unit = $84,000 / $12 per unit = 7,000 units. The margin of safety in units is then Current Sales Units - Break-Even Sales Units = 8,000 units - 7,000 units = 1,000 units. Distractor A is the break-even point in units. Distractor C is the current sales level. Distractor D represents the current total contribution margin in dollars ($12*8000 = 96,000)minusfixedcosts(96,000) minus fixed costs (12,000 profit), not units.

Question 5

A company is considering two different cost structures. Plan A has variable costs of $12 per unit and annual fixed costs of $300,000. Plan B has variable costs of $8 per unit and annual fixed costs of $400,000. The selling price of the product is $20 per unit under either plan.

At what level of unit sales would the company be indifferent between Plan A and Plan B in terms of operating income?

  1. 12,500 units
  2. 25,000 units (correct answer)
  3. 37,500 units
  4. 50,000 units
Explanation: The correct answer is 25,000 units. The point of indifference is where the total operating income for both plans is equal. Let Q be the number of units. Plan A OI = ($20 - $12)Q - $300,000 = $8Q - $300,000 Plan B OI = ($20 - $8)Q - $400,000 = $12Q - $400,000 Set them equal: $8Q - $300,000 = $12Q - $400,000. Solving for Q: $100,000 = $4Q, so Q = 25,000 units. At this sales level, the lower contribution margin of Plan A is exactly offset by its lower fixed costs compared to Plan B.

Question 6

A company's operating income decreased by $15,000 in a period where its sales revenue increased by $75,000. During this period, the company's variable cost per unit and selling price per unit remained constant, but total fixed costs increased by $45,000. What is the company's contribution margin ratio?

  1. 20%
  2. 40% (correct answer)
  3. 60%
  4. 80%
Explanation: The correct answer is 40%. The formula relating the changes is: Change in Operating Income = Change in Contribution Margin - Change in Fixed Costs. We can solve for the change in contribution margin: -\15,000 = \text{Change in CM} - $45,000, so Change in CM = \30,000. The contribution margin ratio is the change in contribution margin divided by the change in sales revenue: $30,000 / $75,000 = 0.40, or 40%. Distractor A (20%) results from dividing the change in operating income by the change in sales, ignoring the fixed cost increase. Distractor C (60%) incorrectly uses the fixed cost increase as the numerator. Distractor D (80%) results from incorrectly adding the income decrease to the fixed cost increase ($45,000 + $15,000) and dividing by the sales increase.

Question 7

Two companies, Innovate Corp. and Praxis Inc., operate in the same industry and reported identical sales revenue and operating income for the last fiscal year. Innovate Corp. has a contribution margin ratio of 70%, while Praxis Inc. has a contribution margin ratio of 40%.

Assuming sales revenue for both companies increases by 15% in the coming year and their cost structures remain unchanged, which of the following statements is most accurate?

  1. Praxis Inc.'s operating income will increase by a greater dollar amount than Innovate Corp.'s.
  2. Innovate Corp.'s operating income will increase by a greater dollar amount than Praxis Inc.'s. (correct answer)
  3. Both companies will experience the same dollar increase in operating income.
  4. The impact cannot be determined without knowing the total fixed costs for each company.
Explanation: The correct answer is that Innovate Corp.'s operating income will increase by a greater dollar amount. Since fixed costs are constant, the increase in operating income is equal to the increase in total contribution margin. The increase in contribution margin is calculated by multiplying the increase in sales revenue by the contribution margin ratio. Because Innovate Corp. has a higher contribution margin ratio (70% vs. 40%), it will generate more contribution margin (and thus more operating income) from the same dollar increase in sales.

Question 8

A company produces two products, Alpha and Beta. Financial data is as follows: Alpha: Selling Price $100, Variable Cost per unit $60. Beta: Selling Price $200, Variable Cost per unit $155. Both products require processing on a special finishing machine. The machine has a total capacity of 2,000 hours per month. Alpha requires 1 hour of machine time per unit, while Beta requires 3 hours of machine time per unit.

To maximize profitability, which product should the company prioritize, and what is the contribution margin per hour of machine time for that product?

  1. Prioritize Alpha, with a contribution margin of $40 per machine hour. (correct answer)
  2. Prioritize Beta, because its contribution margin of $45 per unit is higher.
  3. Prioritize Beta, with a contribution margin of $15 per machine hour.
  4. Prioritize either product, as the total contribution will be the same if all hours are used.
Explanation: The correct answer is to prioritize Alpha. When a resource is constrained, profitability is maximized by prioritizing the product with the highest contribution margin per unit of the constrained resource. For Alpha: Unit CM = (100 - \60 = $40). CM per machine hour = $40 / 1 hour = $40/hour. For Beta: Unit CM = (200 - \155 = $45). CM per machine hour = $45 / 3 hours = $15/hour. Since Alpha generates a higher contribution margin per machine hour, it should be prioritized. Distractor B is incorrect because it focuses on the higher unit contribution margin of Beta, ignoring the constrained resource. Distractor C correctly calculates Beta's CM per hour but makes the wrong prioritization decision.

Question 9

A company has a contribution margin ratio of 40% and fixed costs of $120,000 per month. Management projects that for the coming month, sales will be $400,000.

How much can the company's actual sales revenue fall short of the projection before the company incurs an operating loss?

  1. $300,000
  2. $100,000 (correct answer)
  3. $160,000
  4. $40,000
Explanation: The correct answer is $100,000. This question is asking for the margin of safety in dollars. First, calculate the break-even point in sales dollars: Break-Even Sales = Fixed Costs / Contribution Margin Ratio = $120,000 / 0.40 = $300,000. The margin of safety is the difference between projected sales and break-even sales: $400,000 - $300,000 = $100,000. This is the amount by which sales can fall before a loss occurs. Distractor A is the break-even point itself. Distractor D is the projected operating income ($400,000 * 0.40 - $120,000 = $40,000).

Question 10

A firm has an opportunity to sell 1,000 units of a product at a special price of $25 per unit. The product normally sells for $40. The firm has sufficient idle capacity to produce the units. The product's costs per unit are $18 variable and $10 fixed (based on normal volume). If the firm accepts the order, how will its operating income be affected?

  1. It will increase by $7,000. (correct answer)
  2. It will decrease by $3,000.
  3. It will decrease by $15,000.
  4. It will increase by $25,000.
Explanation: The correct answer is an increase of $7,000. For a special order with idle capacity, fixed costs are irrelevant. The decision should be based on the incremental contribution margin. The incremental revenue is $25 per unit. The incremental cost is the variable cost of 18 per unit. The contribution margin per unit for this order is \(25 - $18 = $7). The total increase in operating income is 1,000 \text{ units} \times \7/\text{unit} = $7,000. Distractor B results from incorrectly including the fixed cost in the analysis (\25 price - $28 total cost = -$3 per unit). Distractor C incorrectly compares the special price to the normal price ($25 - $40 = -$15 per unit).

Question 11

A company anticipates that its selling price per unit will increase by 5% and its variable cost per unit will increase by 8% in the next year. This year, the selling price is $40 and the variable cost is $25. If sales volume in units remains constant, what will be the percentage change in the contribution margin per unit?

  1. A decrease of 3.0%
  2. A decrease of 3.3%
  3. An increase of 5.0%
  4. A decrease of 6.7% (correct answer)
Explanation: The correct answer is a decrease of 6.7%. This requires calculating the contribution margin per unit for both years and then finding the percentage change. Current CM per unit = $40 - $25 = $15. Next year's selling price = $40 \times 1.05 = $42. Next year's variable cost = $25 \times 1.08 = $27. Next year's CM per unit = $42 - $27 = $14. The change in CM per unit is $14 - $15 = -$1. The percentage change is (Change / Original Amount) = (-$1 / $15) = -0.0667, or a decrease of 6.7%. A common mistake is to simply net the percentages (5% - 8% = -3%), which leads to distractor A.

Question 12

A manufacturing company plans to replace a significant portion of its hourly assembly-line workers, whose wages are treated as a variable manufacturing cost, with a fully automated robotic system that will be leased for a flat monthly fee. This is the only change being made.

How will this change most likely affect the company's unit contribution margin and its gross margin per unit, as calculated under absorption costing?

  1. Unit contribution margin will increase; gross margin per unit will also increase.
  2. Unit contribution margin will increase; the effect on gross margin per unit is indeterminate. (correct answer)
  3. Unit contribution margin will decrease; gross margin per unit will increase.
  4. Both unit contribution margin and gross margin per unit will decrease.
Explanation: The correct answer is that the unit contribution margin will increase, while the effect on gross margin per unit is indeterminate. Unit contribution margin (Sales Price - All Variable Costs) will increase because a variable cost (hourly labor) is being replaced by a fixed cost, thus reducing the total variable cost per unit. Gross margin per unit (Sales Price - COGS per unit) is more complex. Under absorption costing, COGS per unit includes both variable and allocated fixed manufacturing costs. The change decreases the variable manufacturing cost but increases the total fixed manufacturing cost, which is then allocated over the units produced. The net effect on the total COGS per unit, and thus the gross margin per unit, depends on the production volume used for allocation and the relative magnitudes of the cost changes.

Question 13

A company is analyzing a product line that has a positive contribution margin of $100,000 but a reported segment loss of $20,000 after allocation of common corporate fixed costs. If the product line is eliminated, the traceable fixed costs of $40,000 associated with the line can be avoided. What would be the impact on the company's overall operating income if this product line is dropped?

  1. An increase of $20,000
  2. An increase of $40,000
  3. A decrease of $100,000
  4. A decrease of $60,000 (correct answer)
Explanation: The correct answer is a decrease of $60,000. When considering dropping a product line, the key is to analyze its segment margin, which is its contribution margin less its traceable fixed costs. Common allocated costs are irrelevant as they will persist even if the line is dropped. The segment margin for this product line is $100,000 (Contribution Margin) - $40,000 (Traceable Fixed Costs) = $60,000. Since the segment margin is positive, the product line contributes $60,000 towards covering common corporate costs. Eliminating the line would result in losing this $60,000 contribution, thus decreasing overall company operating income by that amount.

Question 14

A company currently sells 10,000 units for $50 per unit. The variable cost per unit is $30, and total fixed costs are $150,000. Management is considering a new marketing campaign that would increase fixed costs by $30,000 but is expected to increase sales volume by 20%.

What would be the projected impact on operating income if the campaign is implemented?

  1. An increase of $10,000 (correct answer)
  2. An increase of $40,000
  3. An increase of $20,000
  4. A decrease of $10,000
Explanation: The correct answer is an increase of 10,000. The incremental contribution margin from the increased sales must be compared to the incremental fixed costs. The contribution margin per unit is \(50 - $30 = 20\). The expected increase in sales volume is \(10,000 \text{ units} \times 20\% = 2,000\) units. The incremental total contribution margin is \(2,000 \text{ units} \times \20/\text{unit} = $40,000). The incremental fixed cost is $30,000. The net impact on operating income is the incremental contribution margin minus the incremental fixed cost: (40,000 - \30,000 = $10,000).

Question 15

A company's sales revenue is $500,000, its contribution margin is $200,000, and its operating loss is $50,000. If the company increases its sales volume by 2,000 units, resulting in an additional $40,000 of sales revenue, what will be its new operating income?

  1. A loss of $34,000 (correct answer)
  2. A profit of $16,000
  3. A loss of $10,000
  4. A loss of $26,000
Explanation: The correct answer is a loss of $34,000. First, calculate the contribution margin ratio: CM Ratio = Total CM / Sales Revenue = $200,000 / $500,000 = 40%. Since fixed costs do not change with volume, the increase in operating income will be the additional contribution margin from the new sales. Additional CM = Additional Sales \times CM Ratio = $40,000 \times 40% = $16,000. The original operating loss was $50,000. The new operating income will be the original loss plus the additional CM: -$50,000 + $16,000 = -$34,000, which is a loss of 34,000.DistractorCincorrectlyaddstheentireadditionalsalesrevenuetotheoriginalloss(−34,000. Distractor C incorrectly adds the entire additional sales revenue to the original loss (-50,000 + $40,000).

Question 16

Delta Corp. produces a single product that it sells for $120 per unit. At its typical production level of 5,000 units per month, the per-unit costs are: Direct Materials $40, Direct Labor $25, Variable Overhead $15, Fixed Overhead $10. A one-time special order has been received for 800 units at a price of $82 per unit. Accepting this order would not affect regular sales but would require the purchase of a special tool for $3,000, which would have no other use.

What would be the impact on Delta Corp.'s monthly operating income if the special order is accepted?

  1. An increase of $1,600
  2. A decrease of $1,400 (correct answer)
  3. A decrease of $6,400
  4. A decrease of $9,400
Explanation: The correct answer is a decrease of $1,400. To analyze a special order, we compare incremental revenues to incremental costs. The allocated fixed overhead of 10 is not relevant. The relevant variable cost per unit is the sum of direct materials, direct labor, and variable overhead: \(40 + $25 + $15 = $80). The contribution margin per unit on the special order is (82 - \80 = $2). The total incremental contribution margin is 800 \text{ units} \times \2/\text{unit} = $1,600. However, the order requires an additional fixed cost of \3,000 for the special tool. The net impact is (1,600 - \3,000 = -$1,400), a decrease in operating income. Distractor A ignores the cost of the tool. Distractor C incorrectly includes the allocated fixed cost in the analysis ((82 - \90) * 800 = -$6,400). Distractor D incorrectly includes the allocated fixed cost AND the tool cost (-\6,400 - $3,000 = -$9,400$).

Question 17

A company rents a manufacturing facility for $20,000 per month. This facility has the capacity to produce 8,000 units. If the company needs to produce more than 8,000 units, it must rent an additional, smaller facility for $9,000 per month. The product has a contribution margin of $15 per unit.

The company is currently producing and selling 7,500 units per month. A new client offers to buy 1,500 units per month on a long-term basis. What is the minimum number of units from this new order that the company must sell to cover the incremental fixed cost of the additional facility?

  1. 600 units (correct answer)
  2. 1,500 units
  3. 500 units
  4. 1,934 units
Explanation: The correct answer is 600 units. The new order for 1,500 units would bring total production to 9,000 units (7,500 + 1,500), which exceeds the current capacity of 8,000 units. Therefore, the company must incur the incremental fixed cost of $9,000 for the additional facility. The number of units required to cover this cost is calculated by dividing the incremental fixed cost by the contribution margin per unit: $9,000 / $15 per unit = 600 units. Distractor C incorrectly uses the current production level (7,500) to find the units over capacity (9,000 - 7,500 = 1,500; 8,000 - 7,500 = 500). Distractor D incorrectly uses the total fixed costs ($20,000 + $9,000) instead of the incremental cost.

Question 18

A company is currently operating at a profit. If its sales volume increases and the per-unit selling price, per-unit variable costs, and total fixed costs all remain constant, which of the following will occur?

  1. The contribution margin ratio will increase, and the break-even point in units will decrease.
  2. The total fixed costs will increase, and the operating income will remain constant.
  3. The contribution margin per unit will increase, and the margin of safety will decrease.
  4. The total contribution margin will increase, and the operating income will increase. (correct answer)
Explanation: The correct answer is that the total contribution margin will increase, and the operating income will increase. If sales volume (number of units) increases while per-unit amounts are constant, the total contribution margin (Unit CM x Quantity) will increase. Since total fixed costs remain constant, the increase in total contribution margin will flow directly to operating income (OI = Total CM - Fixed Costs), causing it to increase as well. The contribution margin ratio and per unit CM will remain constant, not increase. The margin of safety will increase, not decrease. Total fixed costs are stated to be constant.

Question 19

DataCorp provides cloud storage services with three pricing tiers. The Basic plan costs $10 per month with variable costs of $3 per customer. The Premium plan costs $25 per month with variable costs of $8 per customer. The Enterprise plan costs $50 per month with variable costs of $15 per customer. Fixed costs total $180,000 per month. Current customer distribution is 60% Basic, 30% Premium, and 10% Enterprise, with 5,000 total customers.

Management wants to incentivize customers to upgrade to higher tiers by offering a 20% discount on Premium plans and a 15% discount on Enterprise plans, while keeping Basic pricing unchanged. They estimate this will shift the customer mix to 40% Basic, 35% Premium, and 25% Enterprise, with total customers increasing to 5,500. What is the percentage change in total contribution margin from this strategy?

  1. Total contribution margin increases by approximately 19.2% due to the favorable shift toward higher-value customer tiers despite the pricing discounts (correct answer)
  2. Total contribution margin decreases by approximately 8.5% as the discount impact outweighs the benefits from customer mix improvements and volume growth
  3. Total contribution margin increases by approximately 12.1% reflecting the net positive impact of volume growth and improved customer distribution patterns
  4. Total contribution margin decreases by approximately 5.3% since the Premium and Enterprise discounts significantly reduce overall profitability per customer
Explanation: Current CM: Basic (3,000 × $7) + Premium (1,500 × $17) + Enterprise (500 × $35) = $21,000 + $25,500 + $17,500 = $64,000. New pricing: Premium = $20 (CM = $12), Enterprise = $42.50 (CM = $27.50). New CM: Basic (2,200 × $7) + Premium (1,925 × $12) + Enterprise (1,375 × $27.50) = $15,400 + $23,100 + $37,813 = 76,313.Percentagechange=(76,313. Percentage change = (76,313 - 64,000)/64,000)/64,000 = 19.2%.

Question 20

RestaurantPlus operates a chain of casual dining establishments. Each location generates average monthly sales of $180,000 with a contribution margin ratio of 65%. Corporate headquarters allocates $45,000 in monthly fixed costs to each location, and each location has direct fixed costs of $75,000 monthly. The company is considering closing a location that has been underperforming with monthly sales of only $140,000 and the same 65% contribution margin ratio. What would be the monthly impact on corporate-wide contribution margin if this location is closed?

  1. Corporate contribution margin decreases by $91,000 monthly, representing the full contribution margin lost from the closed location (correct answer)
  2. Corporate contribution margin decreases by $46,000 monthly, calculated as the location's contribution margin minus allocated corporate costs
  3. Corporate contribution margin increases by $29,000 monthly, as the savings from eliminated fixed costs exceed the lost contribution margin
  4. Corporate contribution margin decreases by $120,000 monthly, reflecting both lost sales contribution and stranded corporate overhead costs
Explanation: The underperforming location generates contribution margin of $140,000 × 65% = $91,000 monthly. Closing the location eliminates this $91,000 contribution margin. Fixed costs don't affect contribution margin calculations - they impact operating income. The allocated corporate costs would likely continue and be absorbed by other locations. Choice A correctly identifies the $91,000 decrease in contribution margin. Choice B incorrectly subtracts allocated costs from contribution margin. Choice C incorrectly includes fixed cost savings in contribution margin. Choice D overstates the impact by including fixed costs.