B. Gross Profit: Contribution Margin

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Contribution Margin: The amount by which sales revenue exceeds variable costs

How is Contribution Margin (CM) used? It is used to predict profit at different sales levels.
CM ratio = CM/ Sales or Sales –Variable Cost = Contribution Margin
Or CM = Fixed Cost – Loss Contribition margion is also called Marginal Income

The breakeven point is where , Total Revenue is equal to Total Cost


Break-even point : The level of sales at which contribution margin just covers fixed costs and net
income is equal to zero.
Break Even Point in Units = Fixed Costs / CM per Unit How many units do we need to sell to break even?

The difference between sales and cost of goods sold equals ________.
a. operating profit
b. gross profit
c. profit after tax
d. net profit

Which of the following will increase the contribution margin?


a. Reduction in fixed costs
b. Reduction in variable costs
c. Reduction in net income
d. Reduction in sales

Which of the following would decrease variable costs?


a. Reduction in salaries of administrative department
b. Reduction in research expenditure
c. Reduction in wages paid as direct labor
d. Reduction in rent expense

With reference to cost-volume-profit analysis, identify the correct statement.


a. Sales + Variable cost + Fixed cost = Net operating income
b. Sales − Variable cost − Net operating income = Fixed cost
c. Sales − Variable cost + Fixed cost = Net operating income
d. Sales + Variable cost = Fixed cost − Net operating income

Contribution margin = Sales − Variable cost = Fixed cost + Net operating income. Therefore, subtracting
variable cost and income from sales will yield fixed costs.

The break-even point is the level of sales at which the contribution margin covers ________.
a. net income before tax
b. net income after tax
c. variable costs
d. fixed costs

The break-even point is the level of sales at which the contribution margin just covers fixed costs. At this
level, income is equal to zero.

________ refers to the relative proportion of fixed and variable costs in a company.
a. Income structure
b. Cost structure
c. Sales structure
d. Tax structure
A company operating near the break-even point will have a ________.
a. low level of financial leverage
b. high level of operating leverage
c. high level of financial leverage
d. low level of operating leverage

What is Operating Leverage? The measure of the proportion of fixed costs in a company's cost structure.
It is used as an indicator of how sensitive profit is to changes in sales volume.
OL = CM / NI
For every unit sold, contribution margin will ______ in total. Increase
If a company has a low Contribution Margin, how can it increase NI? Decrease expenses

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