Question

1.

Laurent Industries is attempting to calculate the number of units they would have to sell of their product to reach a target level of operating income for the upcoming month. Which formula would you recommend that they use to make this calculation?

	A.	(Fixed costs + target profit) / contribution margin per unit.
	B.	Fixed costs / contribution margin ratio.
	C.	(Fixed costs + target profit) / contribution margin ratio.
	D.	Fixed costs / contribution margin per unit.
	E.	Fixed costs + (target profit / contribution margin per unit).

2.

You are hired as a manager at Seiko Inc. and put in charge of their newest watch, the Grand Seiko™. Your managerial accountant is attempting to prove that you’re too young to have such a prestigious position. During a meeting with the Board of Directors, she pulls out a cost-volume-profit graph and states, “I bet you couldn’t even point out where the breakeven point is.” Where on the graph would you point?

	A.	Where the contribution margin per unit line crosses the fixed expense line.
	B.	Where the variable expense line meets the operating profit line.
	C.	Where the total expense line crosses the Y axis.
	D.	Where the sales revenue line crosses the total expense line.
	E.	Where the fixed expenses line crosses the sales revenue line.

Answer 1

1) answer option A

Number of units sold to attain target profit = fixed cost + target profit/CONTRIBUTION MARGIN PER UNIT

it's a direct formula therefore no additional explanation required

2) answer option D

break even point means where the point there will be no profit and no loss

when sales revenue line crosses the total expenses line

here by total expenses means variable expenses + fixed expenses

if sales revenue = variable expenses +fixed expenses then break even point

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