Question 1

The higher the magnitude of a company's operating leverage, the smaller the decrease in profit for a given percentage decrease in revenue.

Accepted Answer

A) True 
 B)False

Question 2

The following information is for Gable, Inc. and Harlowe, Inc. for the recent year.  Based on the above data, which company has a higher operating leverage?

Accepted Answer

A)   Gable, Inc.
B)   Harlowe, Inc.
C)   Operating leverage is the same for both companies
D)   Cannot be determinedE) B) and D)
F) B) and C)

Question 3

If a company is operating beyond its break-even point, sale of one more unit of product increases the company's profit by the amount of the unit contribution margin.

Accepted Answer

A) True 
 B)False

Question 4

Fixed cost per unit:

Accepted Answer

A)   decreases as production volume decreases.
B)   is not affected by changes in the production volume.
C)   decreases as production volume increases.
D)   increases as production volume increases.E) All of the above
F) C) and D)

Question 5

A cost that contains both fixed and variable elements is referred to as a:

Accepted Answer

A)   mixed cost.
B)   hybrid cost.
C)   relevant cost.
D)   nonvariable cost.E) A) and B)
F) None of the above

Question 6

Falls Company has a contribution margin of $32 per unit and fixed costs of $500,000, and it desires to earn a profit of $100,000. What is the sales volume in units required to achieve this desired profit?

Accepted Answer

A)   3,125 units
B)   18,750 units
C)   15,625 units
D)   12,500 unitsE) None of the above
F) A) and C)

Question 7

Carson Corporation's sales increase from $500,000 to $600,000 in the current year. What is the percentage change in sales?

Accepted Answer

A)   20%
B)   25%
C)   22%
D)   16.7%E) All of the above
F) A) and B)

Question 8

Costs that might be incurred by service, merchandising, and manufacturing companies are described below:
  Required:
Classify each cost as variable (V) or fixed (F) with respect to volume or level of activity.

Accepted Answer

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Question 9

Phan Company has not reported a profit in five years. This year the company would like to narrow its loss to $7,500. Assuming its selling price is $36.50 per unit and its variable costs per unit are $24, how many units must be sold to achieve its target given that total fixed costs are $60,000?

Accepted Answer

A)   2,188
B)   1,439
C)   4,200
D)   1,600E) All of the above
F) A) and D)

Question 10

At the break-even point:

Accepted Answer

A)   Sales would be equal to total costs.
B)   Contribution margin would be equal to total fixed costs.
C)   Sales would be equal to fixed costs.
D)   Both sales would be equal to total costs and contribution margin would be equal to total fixed costs are correct.E) B) and D)
F) A) and C)

Question 11

No contribution margin is provided by selling one unit of a product at a price of $35 if variable production costs are $20, variable general and administrative costs are $5, and fixed costs are $10 per unit.

Accepted Answer

A) True 
 B)False

Question 12

A low magnitude of operating leverage is best for most companies.

Accepted Answer

A) True 
 B)False

Question 13

Select from the following the incorrect statement regarding contribution margin.

Accepted Answer

A)   Sales - Fixed costs = Contribution margin
B)   Net income + Total fixed costs = Contribution margin
C)   At the breakeven point (where the company has neither profit nor loss) , Total fixed costs = Total contribution margin
D)   Total sales revenue times the contribution margin percentage = Total contribution marginE) A) and C)
F) None of the above

Question 14

Based on the income statements shown below, which division has the cost structure with the highest operating leverage?

Accepted Answer

A)   Bottled Water.
B)   Fruit Juices.
C)   Soft Drinks.
D)   The three divisions have identical operating leverage.E) B) and D)
F) C) and D)

Question 15

Rock Creek Bottling Company pays its production manager a salary of $6,000 per month. Salespersons are paid strictly on commission, at $1.50 for each case of product sold. For Rock Creek Bottling Company, the cost of the salespersons' commissions is an example of:

Accepted Answer

A)   a fixed cost.
B)   a variable cost.
C)   a mixed cost.
D)   none of theseE) A) and B)
F) A) and C)

Question 16

If revenues are expected to decline, management should attempt to convert its variable costs into fixed costs.

Accepted Answer

A) True 
 B)False

Question 17

During the current year, Winchester Company sold 80,000 units at a selling price of $20 per unit. Variable cost per unit was $15, and Winchester's net income for the year was $40,000. What was the amount of Winchester's fixed costs?

Accepted Answer

A)   $360,000
B)   $440,000
C)   $1,160,000
D)   $400,000E) B) and D)
F) All of the above

Question 18

Select the correct statement regarding fixed costs.

Accepted Answer

A)   Because they do not change, fixed costs should be ignored in decision making.
B)   The fixed cost per unit decreases when volume increases.
C)   The fixed cost per unit increases when volume increases.
D)   The fixed cost per unit does not change when volume decreases.E) None of the above
F) C) and D)

Question 19

Based on the income statements of the three following retail businesses, which company has the highest operating leverage?

Accepted Answer

A)   Alpha Company
B)   Beta Company
C)   Gamma Company
D)   They all have same operating leverageE) A) and C)
F) A) and B)

Question 20

Which of the following equations can be used to compute a firm's magnitude of operating leverage?

Accepted Answer

A)   Net income ÷ Sales
B)   Fixed costs ÷ Contribution margin
C)   Contribution margin ÷ Net income
D)   Net income ÷ Contribution marginE) All of the above
F) A) and C)

Exam 11: Cost Behavior, Operating Leverage, and Profitability Analysis

Falls Company has a contribution margin of $32 per unit and fixed costs of $500,000, and it desires to earn a profit of $100,000. What is the sales volume in units required to achieve this desired profit?

Correct AnswerverifiedShow Answer

The higher the magnitude of a company's operating leverage, the smaller the decrease in profit for a given percentage decrease in revenue.

Correct AnswerverifiedShow Answer

Select from the following the incorrect statement regarding contribution margin.

Correct AnswerverifiedShow Answer

A cost that contains both fixed and variable elements is referred to as a:

Correct AnswerverifiedShow Answer

Select the correct statement regarding fixed costs.

Correct AnswerverifiedShow Answer

Which of the following equations can be used to compute a firm's magnitude of operating leverage?

Correct AnswerverifiedShow Answer

During the current year, Winchester Company sold 80,000 units at a selling price of $20 per unit. Variable cost per unit was $15, and Winchester's net income for the year was $40,000. What was the amount of Winchester's fixed costs?

Correct AnswerverifiedShow Answer

At the break-even point:

Correct AnswerverifiedShow Answer

Based on the income statements shown below, which division has the cost structure with the highest operating leverage?

Correct AnswerverifiedShow Answer

If revenues are expected to decline, management should attempt to convert its variable costs into fixed costs.

Correct AnswerverifiedShow Answer

Carson Corporation's sales increase from $500,000 to $600,000 in the current year. What is the percentage change in sales?

Correct AnswerverifiedShow Answer

Costs that might be incurred by service, merchandising, and manufacturing companies are described below: Required: Classify each cost as variable (V) or fixed (F) with respect to volume or level of activity.

Correct Answerverified_TB3570_00...View AnswerShow Answer

The following information is for Gable, Inc. and Harlowe, Inc. for the recent year. Based on the above data, which company has a higher operating leverage?

Correct AnswerverifiedShow Answer

No contribution margin is provided by selling one unit of a product at a price of $35 if variable production costs are $20, variable general and administrative costs are $5, and fixed costs are $10 per unit.

Correct AnswerverifiedShow Answer

Fixed cost per unit:

Correct AnswerverifiedShow Answer

Phan Company has not reported a profit in five years. This year the company would like to narrow its loss to $7,500. Assuming its selling price is $36.50 per unit and its variable costs per unit are $24, how many units must be sold to achieve its target given that total fixed costs are $60,000?

Correct AnswerverifiedShow Answer

If a company is operating beyond its break-even point, sale of one more unit of product increases the company's profit by the amount of the unit contribution margin.

Correct AnswerverifiedShow Answer

A low magnitude of operating leverage is best for most companies.

Correct AnswerverifiedShow Answer

Rock Creek Bottling Company pays its production manager a salary of $6,000 per month. Salespersons are paid strictly on commission, at $1.50 for each case of product sold. For Rock Creek Bottling Company, the cost of the salespersons' commissions is an example of:

Correct AnswerverifiedShow Answer

Based on the income statements of the three following retail businesses, which company has the highest operating leverage?

Correct AnswerverifiedShow Answer

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