Sales revenue (30,000 units) Variable costs Contribution margin Fixed costs Operating income At the breakeven point: O Sales are equal to total fixed costs. O Contribution margin in equal to sales. O Contribution margin is equal to total fixed costs. O Sales are equal to total variable costs. Total $750,000 450,000 300,000 150,000 $150,000 Per unit 25 15 ?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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# Business Economics: Contribution Margin Analysis

Understanding the contribution margin is crucial for determining the profitability of a company before deducting fixed costs.

### Financial Overview (30,000 units):

| **Item**                  | **Total**   | **Per unit**  |
|---------------------------|-------------|---------------|
| **Sales revenue**         | $750,000    | 25            |
| **Variable costs**        | $450,000    | 15            |
| **Contribution margin**   | $300,000    | ?             |
| **Fixed costs**           | $150,000    |               |
| **Operating income**      | $150,000    |               |

### Key Financial Metrics:
- **Sales Revenue**: $750,000
- **Variable Costs**: $450,000
- **Contribution Margin**: $300,000
- **Fixed Costs**: $150,000
- **Operating Income**: $150,000

### Detailed Analysis:
1. **Sales Revenue**: This is the total income from sales of 30,000 units, calculated at $25 per unit.
2. **Variable Costs**: The costs directly related to producing 30,000 units, valued at $15 per unit.
3. **Contribution Margin**: Represents the revenue remaining after all variable costs are subtracted from sales revenue. It can be calculated per unit by subtracting the variable cost per unit from the sales price per unit. Here, it's $25 - $15 = $10 per unit.
4. **Fixed Costs**: These are costs that do not change with the level of production or sales and are valued at $150,000.
5. **Operating Income**: The profit from operations after subtracting fixed costs from the contribution margin.

### Understanding the Breakeven Point:
At the breakeven point:
- The total sales are equal to the total of the fixed costs plus variable costs.
- All generated revenue covers the exact total fixed and variable costs without any profit or loss.
  
#### Multiple Choice Question at the Breakeven Point:
A. Sales are equal to total fixed costs.
B. Contribution margin is equal to sales.
C. Contribution margin is equal to total fixed costs.
D. Sales are equal to total variable costs.

**To Answer:**
Select the correct option that describes the breakeven scenario. The correct answer is usually "Contribution margin is equal to total fixed costs
Transcribed Image Text:# Business Economics: Contribution Margin Analysis Understanding the contribution margin is crucial for determining the profitability of a company before deducting fixed costs. ### Financial Overview (30,000 units): | **Item** | **Total** | **Per unit** | |---------------------------|-------------|---------------| | **Sales revenue** | $750,000 | 25 | | **Variable costs** | $450,000 | 15 | | **Contribution margin** | $300,000 | ? | | **Fixed costs** | $150,000 | | | **Operating income** | $150,000 | | ### Key Financial Metrics: - **Sales Revenue**: $750,000 - **Variable Costs**: $450,000 - **Contribution Margin**: $300,000 - **Fixed Costs**: $150,000 - **Operating Income**: $150,000 ### Detailed Analysis: 1. **Sales Revenue**: This is the total income from sales of 30,000 units, calculated at $25 per unit. 2. **Variable Costs**: The costs directly related to producing 30,000 units, valued at $15 per unit. 3. **Contribution Margin**: Represents the revenue remaining after all variable costs are subtracted from sales revenue. It can be calculated per unit by subtracting the variable cost per unit from the sales price per unit. Here, it's $25 - $15 = $10 per unit. 4. **Fixed Costs**: These are costs that do not change with the level of production or sales and are valued at $150,000. 5. **Operating Income**: The profit from operations after subtracting fixed costs from the contribution margin. ### Understanding the Breakeven Point: At the breakeven point: - The total sales are equal to the total of the fixed costs plus variable costs. - All generated revenue covers the exact total fixed and variable costs without any profit or loss. #### Multiple Choice Question at the Breakeven Point: A. Sales are equal to total fixed costs. B. Contribution margin is equal to sales. C. Contribution margin is equal to total fixed costs. D. Sales are equal to total variable costs. **To Answer:** Select the correct option that describes the breakeven scenario. The correct answer is usually "Contribution margin is equal to total fixed costs
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