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Quizzes > Business & Finance > Finance & Economics

Can You Calculate Sales Revenue Minus All Variable Expenses?

Ready to tackle total contribution margin less total fixed expenses equals? Start the quiz now!

Difficulty: Moderate
2-5mins
Learning OutcomesCheat Sheet
Paper art quiz illustration including papers pencils calculator on golden yellow background for accounting formulas quiz

This quiz helps you master the formula: sales revenue minus all variable expenses equals contribution margin. Solve short problems on contribution margin and how total contribution margin less fixed expenses equals net operating income, with instant feedback so you can spot gaps before the exam. Pair this with exam 1 prep or try a quick accounting quiz .

What does 'contribution margin' represent?
Sales revenue minus variable expenses
Variable expenses minus fixed expenses
Total revenue minus total expenses
Sales revenue minus fixed expenses
The contribution margin is defined as sales revenue less variable expenses, showing how much revenue remains to cover fixed costs and profit. It is a key measure in cost - volume - profit analysis. By subtracting variable costs from sales, managers understand how much each sale contributes to fixed expenses and profit. .
If a company has sales of $10,000 and variable expenses of $6,000, what is its contribution margin in dollars?
$6,000
$10,000
$4,000
$2,500
Contribution margin in dollars is calculated by subtracting total variable expenses from total sales revenue. In this case, $10,000 minus $6,000 equals $4,000. This result shows funds available to cover fixed costs and profit. .
Which of the following costs is considered a variable expense?
Insurance premium
Factory rent
Direct materials
Depreciation
Variable expenses change in total with the level of production or sales. Direct materials vary directly with output whereas costs like rent and depreciation remain fixed regardless of volume. Understanding variable versus fixed costs is crucial for CVP analysis. .
If the unit selling price is $20 and unit variable cost is $12, what is the unit contribution margin?
$12
$20
$8
$32
Unit contribution margin equals the unit selling price minus the unit variable cost. Here, $20 minus $12 equals $8. This per-unit margin contributes to covering fixed costs and generating profit. .
What is the contribution margin ratio formula?
Contribution margin divided by sales revenue
Fixed expenses divided by sales revenue
Variable expenses divided by sales revenue
Contribution margin divided by variable expenses
The contribution margin ratio is calculated by dividing the contribution margin by total sales revenue. It indicates the percentage of each sales dollar that is available to cover fixed costs and profit. This ratio is often used for break-even and target profit analyses. .
Which cost remains constant in total regardless of changes in production volume within the relevant range?
Fixed cost
Step cost
Mixed cost
Variable cost
Fixed costs remain unchanged in total within the relevant range of activity. They do not vary with production volume, unlike variable costs. Recognizing fixed and variable behaviour helps in forecasting and budgeting. .
What is the break-even point in units for a company with fixed costs of $50,000 and a unit contribution margin of $10?
2,500 units
10,000 units
4,000 units
5,000 units
Break-even in units is calculated by dividing total fixed costs by unit contribution margin. Here, $50,000 divided by $10 per unit equals 5,000 units needed to cover all costs. Beyond this point, profit is earned. .
What is the break-even point in sales dollars for the same company if the contribution margin ratio is 40%?
$125,000
$50,000
$100,000
$200,000
Break-even in dollars is fixed costs divided by the contribution margin ratio. $50,000 fixed costs ÷ 0.40 equals $125,000 in sales required to break even. This metric helps in revenue planning. .
If a company has sales revenue of $80,000 and a contribution margin ratio of 35%, what is the total contribution margin?
$80,000
$28,000
$45,000
$35,000
Total contribution margin equals sales revenue multiplied by the contribution margin ratio. $80,000 × 0.35 equals $28,000 available to cover fixed costs and profit. This is a key measure of profitability. .
Before a company can earn a profit, its contribution margin must:
Be equal to variable expenses
Be less than fixed expenses
Exceed fixed expenses
Exceed variable expenses
Profit occurs only after the contribution margin covers all fixed expenses. Once contribution margin exceeds fixed costs, each additional dollar of contribution margin contributes to profit. This concept underpins break-even analysis. .
If fixed costs are $30,000 and unit contribution margin is $5, how many units must be sold to break even?
6,000 units
4,000 units
5,000 units
7,500 units
Break-even in units = Fixed costs ÷ Unit contribution margin = $30,000 ÷ $5 = 6,000 units. This answers how many units must be sold to cover all fixed and variable costs. .
A company's sales revenue is $200,000, variable expenses are $120,000, and fixed expenses are $50,000. What is its contribution margin ratio?
40%
25%
60%
20%
Contribution margin = $200,000 ? $120,000 = $80,000. Ratio = $80,000 ÷ $200,000 = 0.40 or 40%. This ratio shows the percentage of sales revenue available to cover fixed costs and profit. .
A business desires a target profit of $20,000. If fixed costs are $50,000 and the contribution margin ratio is 25%, what level of sales in dollars is needed?
$220,000
$200,000
$300,000
$280,000
Required sales = (Fixed costs + Target profit) ÷ CM ratio = ($50,000 + $20,000) ÷ 0.25 = $280,000. This shows sales needed to cover costs and achieve desired profit. .
The margin of safety is defined as:
Actual sales minus break-even sales
Fixed costs minus variable costs
Break-even sales minus actual sales
Contribution margin minus fixed costs
Margin of safety = Actual sales ? Break-even sales. It indicates the cushion before a company incurs a loss. A larger margin suggests lower risk of losses from sales decline. .
If a company increases its selling price per unit while keeping variable cost constant, what happens to its unit contribution margin?
It remains the same
It increases
It decreases
It becomes zero
Unit contribution margin = Selling price ? Variable cost. When selling price rises and variable cost stays constant, the difference grows, increasing the margin. This improves profitability per unit sold. .
Which of the following is TRUE regarding variable costing?
Inventory includes fixed manufacturing overhead
Fixed overhead is allocated to units produced
Fixed manufacturing overhead is treated as a period cost
Unit product cost includes fixed manufacturing overhead
Under variable costing, fixed manufacturing overhead is expensed in the period incurred and not inventoried. Only variable production costs attach to units. This contrasts with absorption costing treatment. .
Under absorption costing, which costs are included in inventory valuation?
Variable manufacturing costs only
All manufacturing and selling costs
Variable and fixed manufacturing costs
Variable and fixed manufacturing and fixed selling costs
Absorption costing assigns both variable and fixed manufacturing overhead to product inventory. Selling and administrative costs remain period expenses. This matches GAAP inventory valuation rules. .
Which product should a company emphasize to maximize contribution margin if Product A has a 40% CM ratio and Product B has a 60% CM ratio?
Neither
Both equally
Product B
Product A
A higher contribution margin ratio means more revenue per sales dollar is available for fixed costs and profit. Thus, emphasizing Product B with a 60% ratio yields higher total contribution margin. .
If fixed costs are $120,000 and contribution margin is $80,000, the company will:
Break even
Incur a loss of $40,000
Earn a profit of $200,000
Earn a profit of $40,000
Net operating income = Contribution margin ? Fixed costs = $80,000 ? $120,000 = ?$40,000. This negative amount represents a loss. It shows contribution margin must exceed fixed costs to generate profit. .
Direct labor and variable manufacturing overhead are classified as:
Mixed costs
Fixed costs
Period costs
Variable costs
Direct labor and variable manufacturing overhead vary with the level of production, making them variable costs. They are included in product costs under both costing methods. .
A company has fixed costs of $45,000, produces X (CM $10) and Y (CM $15) in a sales mix of 3 units of X for every 1 unit of Y. What is the break-even point in total units?
4,000 units
5,000 units
3,000 units
6,000 units
Compute combined CM per bundle: 3×$10 + 1×$15 = $45. Break-even bundles = $45,000 ÷ $45 = 1,000 bundles. Total units = 1,000 bundles × 4 units = 4,000 units. .
What is the degree of operating leverage (DOL) formula?
Net operating income divided by sales
Contribution margin divided by net operating income
Variable costs divided by sales
Fixed costs divided by contribution margin
Degree of operating leverage = Contribution margin ÷ Net operating income. It measures sensitivity of operating income to changes in sales. A higher DOL implies greater profit volatility relative to sales changes. .
If a company's contribution margin is $120,000 and net operating income is $30,000, its degree of operating leverage is:
4
0.25
1
3
DOL = Contribution margin ÷ Net operating income = $120,000 ÷ $30,000 = 4. This indicates that a 1% change in sales produces a 4% change in operating income. .
A segment is a candidate for discontinuation if its segment margin is:
Equal to traceable fixed costs
Negative
Positive
Zero
Segment margin = Segment contribution margin ? Traceable fixed costs. A negative segment margin means the segment does not cover its own fixed costs and may be discontinued. .
How does a change in inventory levels under absorption costing affect net operating income?
An increase in inventory decreases net income
An increase in inventory increases net income
Inventory changes have no effect
Only variable costing is affected
Under absorption costing, a portion of fixed manufacturing overhead is included in inventory. If inventory levels rise, some fixed overhead is deferred in inventory, boosting current period net income. .
Which cost is irrelevant for a special pricing decision?
Direct labor cost
Incremental variable costs
Allocated fixed overhead
Direct materials cost
Allocated fixed overhead is a sunk or arbitrary allocation not affected by the special order, so it is irrelevant for pricing decisions. Relevant costs are those that change with the decision, like incremental variable costs. .
In CVP analysis, the 'relevant range' refers to:
The range of selling prices
The range over which cost behavior assumptions are valid
The maximum production capacity
The break-even units
The relevant range is the activity span where fixed and variable cost relationships hold true. Outside this range, cost behaviours may change. It is essential for accurate CVP modeling. .
For a multi-product break-even analysis, which method is commonly used?
Degree of operating leverage
Contribution margin ratio of highest product
Weighted average contribution margin approach
Margin of safety
The weighted average contribution margin method accounts for different unit CMs and sales mix. It calculates a combined CM per unit bundle to determine overall break-even. This provides accurate multi-product analysis. .
A company wants an after-tax profit of $50,000. The tax rate is 20%, fixed costs are $100,000, and the CM ratio is 40%. What level of sales dollars is needed?
$375,000
$312,500
$406,250
$400,000
Required pre-tax profit = $50,000 ÷ (1 ? 0.20) = $62,500. Total required = Fixed costs + pre-tax profit = $162,500. Sales = $162,500 ÷ 0.40 = $406,250. This accounts for taxes in CVP. .
Which cost is a sunk cost and should be ignored in incremental analysis?
Historical machine cost already expensed
Future maintenance cost
Incremental labor cost
Direct materials cost
Sunk costs are past costs that cannot be changed by current or future decisions and should be ignored in incremental analyses. Only costs that differ between alternatives matter. .
Activity-based costing (ABC) allocates overhead by:
Allocating all overhead evenly across products
Assigning costs to activities and then to products based on cost drivers
Using a single plant-wide rate
Excluding nonmanufacturing costs
ABC assigns overhead first to activities based on resource consumption, then to products based on activity drivers. This yields more accurate product costing than broad averages. .
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Study Outcomes

  1. Apply Contribution Margin Formula -

    Compute how sales revenue minus all variable expenses equals the contribution margin for various products and services.

  2. Determine Net Operating Income -

    Calculate net operating income by applying total contribution margin less total fixed expenses equals net operating income to different business scenarios.

  3. Analyze Break-even and Safety Margin -

    Use contribution margin and fixed cost data to identify break-even points and margin of safety for informed decision-making.

  4. Interpret Cost Behavior Impacts -

    Assess how changes in variable and fixed expenses influence contribution margin and overall profitability.

  5. Solve Real-world Scenarios -

    Apply cost-volume-profit analysis techniques to practical questions, reinforcing your grasp on key accounting formulas.

  6. Reinforce Accounting Terminology -

    Strengthen your mastery of vital terms like contribution margin formula and variable versus fixed expenses through targeted quiz practice.

Cheat Sheet

  1. Contribution Margin Formula -

    Understand that sales revenue minus all variable expenses equals your contribution margin, the core of cost-volume-profit analysis as taught by institutions like Harvard Business School. For example, on $120,000 sales with $75,000 in variable costs, the contribution margin is $45,000, revealing how much is available to cover fixed costs. Think "Sell - Variable = Contribution" as a quick mnemonic for swift recall.

  2. Contribution Margin Ratio -

    The contribution margin ratio is calculated by dividing contribution margin by total sales and multiplying by 100, a standard approach in texts from the University of Texas at Austin. If your contribution margin is $45,000 on $120,000 in sales, your CM ratio is 37.5%, meaning each sales dollar contributes $0.375 to fixed costs and profit. This percentage form helps you forecast profit changes under different sales scenarios at a glance.

  3. Profit Equation -

    Apply the rule that total contribution margin less total fixed expenses equals net operating income, a formula emphasized by Texas A&M University's accounting department. For instance, subtracting fixed expenses of $30,000 from a total contribution margin of $45,000 leaves you with $15,000 in net operating income. This subtraction step bridges the gap from contribution margin to bottom-line profit instantly.

  4. Break-even Point Calculation -

    Find your break-even sales by dividing total fixed expenses by contribution margin per unit or ratio, a method detailed in the Journal of Accountancy. If fixed costs are $30,000 and each unit's CM is $15, you need to sell 2,000 units, or $80,000 in sales at a 37.5% CM ratio, to break even. Remember "Fixed ÷ CM" to quickly zero in on your break-even mark.

  5. Weighted Average Contribution Margin -

    In multi-product firms, calculate each product's contribution margin (sales revenue minus variable expenses) and weight by its sales mix, following guidelines from the Institute of Management Accountants. For example, with a $30 CM at 60% mix and $20 CM at 40%, your weighted CM is $26 per composite unit, guiding accurate break-even and profitability forecasts. This technique ensures diverse product lines are evaluated with equal precision.

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