Finance for Non-Finance Managers Basic Finance 4 — Questions and Answers
Question 1: A product sells for $100 and has variable costs of $60 per unit. What is the contribution margin per unit?
- $60
- $40 (Correct answer)
- $100
- $160
Correct answer: $40
Contribution margin = Selling Price − Variable Cost = $100 − $60 = $40 per unit.
Question 2: Net income differs from operating income because net income also subtracts:
- Cost of goods sold and gross profit adjustments
- Interest expense and income taxes (Correct answer)
- Depreciation and amortization
- Capital expenditures and dividends
Correct answer: Interest expense and income taxes
Net income = Operating income − Interest expense − Taxes, reflecting the 'bottom line' after all obligations.
Question 3: A company has $2M in total debt and $4M in total equity. Its debt-to-equity ratio is:
- 0.25
- 0.5 (Correct answer)
- 2.0
- 6.0
Correct answer: 0.5
Debt-to-equity ratio = Total Debt / Total Equity = $2M / $4M = 0.5.
Question 4: Accounts receivable on the balance sheet represents:
- Cash already collected from customers
- Money customers owe the company for completed sales (Correct answer)
- Advance payments made to suppliers
- Revenue not yet earned
Correct answer: Money customers owe the company for completed sales
Accounts receivable is a current asset — amounts billed to customers for goods/services delivered but not yet paid.
Question 5: Break-even analysis helps managers determine:
- The maximum profit possible in a period
- The sales volume at which revenue equals total costs (Correct answer)
- How much cash is needed for operations
- The optimal price for maximum market share
Correct answer: The sales volume at which revenue equals total costs
Break-even analysis finds the output level where total revenue equals total costs, resulting in zero profit or loss.
Question 6: When a company uses FIFO (First-In, First-Out) inventory accounting during a period of rising prices, the result is:
- Higher COGS and lower net income than LIFO
- Lower COGS and higher net income than LIFO (Correct answer)
- The same net income as LIFO
- Higher inventory write-downs than LIFO
Correct answer: Lower COGS and higher net income than LIFO
FIFO assigns older (cheaper) costs to COGS first, leaving newer (higher) costs in inventory, resulting in lower COGS and higher profits versus LIFO.
Question 7: A capital expenditure (CapEx) differs from an operating expense (OpEx) because CapEx:
- Is recorded as an immediate expense on the income statement
- Provides economic benefit over multiple future periods (Correct answer)
- Is always a smaller dollar amount
- Does not appear on any financial statement
Correct answer: Provides economic benefit over multiple future periods
CapEx represents investments in long-term assets that provide benefit over multiple years and are capitalized on the balance sheet, not expensed immediately.
Finance for Non-Finance Managers Basic Finance 4
A product sells for $100 and has variable costs of $60 per unit.
What is the contribution margin per unit?