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Exam 2: Cost Behavior, operating Leverage, and Profitability Analysis

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Question 41

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Companies A and B are in the same industry and are identical except for cost structure.At a volume of 50,000 units,the companies have equal net incomes.At 60,000 units,Company A's net income would be substantially higher than B's.Based on this information,

A) Company A's cost structure has more variable costs than B's.
B) Company A's cost structure has higher fixed costs than B's.
C) Company B's cost structure has higher fixed costs than A's.
D) At a volume of 50,000 units, Company A's magnitude of operating leverage was lower than B's.

E) B) and C)
F) B) and D)

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Question 42

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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 production manager's salary is an example of:

A) a variable cost.
B) a mixed cost.
C) a fixed cost.
D) None of these

E) All of the above
F) A) and C)

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Question 43

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Contribution margin represents the amount available to cover fixed expenses and then provide company profits.

Select the term from the list provided that best matches each of the following descriptions.

Assume that management uses the regression method to separate a mixed cost into its fixed and variable components.Briefly describe the significance of the R Square (R²)when interpreting the reliability of cost estimates that result.

Blackstock Company manufactures digital cameras.Indicate whether its cost behavior is fixed,variable,or mixed by placing X's in the appropriate boxes.As an example,commissions paid to sales staff would be classified as variable. $\begin{array} { | l | l | l | l | } \hline { \text { Cost } } & { \text { Cost Behavior } } \\\hline \text { Insurance on executive offices } & \text { Fixed } & \text { Variable } & \text { Mixed } \\\hline \text { Lens caps for digital cameras } & & & \\\hline \text { Depreciation on manufacturing equipment } & & & \\\hline \text { Shipping cost to deliver products to customers } & & & \\\hline \text { Salary of company president } & & & \\\hline \text { Wages of assembly workers } & & & \\\hline \text { Product advertising } & & & \\\hline \text { Utilities: electricity to run machines and for heat and } & & & \\\text { lights in factory } & & &\\\hline\end{array}$

Wu Company incurred $40,000 of fixed cost and $50,000 of variable cost when 4,000 units of product were made and sold. If the company's volume doubles,the company's total cost will:

Cool Runnings operates a chain of frozen yogurt shops.The company pays $5,000 of rent expense per month for each shop.The managers of each shop are paid a salary of $3,000 per month and all other employees are paid on an hourly basis.Relative to the number of shops,the cost of rent is which kind of cost?

Two different costs incurred by Ruiz Company exhibit the following behavior pattern per unit: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Unit Sold }$ $\begin{array}{lrr}&50&100&150&200\\ \text {Cost \#1 } & \text {\$ 300 Per unit} & \text { \$ 150 Per unit }& \text { \$ 100 Per unit}&\text { \$ 75 Per unit} \\ \text {Cost\#2 } & \text { \$ 2 Per unit}&\text { \$ 2 perunit}&\text { \$ 2 perunit}&\text { \$ 2 perunit}\\\end{array}$ Cost #1 and Cost #2 exhibit which of the following cost behavior patterns,respectively?

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.

The activity director for City Recreation is planning an activity.She is considering alternative ways to set up the activity's cost structure.Select the incorrect statement from the following.

Mug Shots operates a chain of coffee shops.The company pays rent of $15,000 per year for each shop.Supplies (napkins,bags,and condiments) are purchased as needed.The managers of each shop are paid a salary of $2,500 per month and all other employees are paid on an hourly basis.The cost of rent relative to the number of customers in a particular shop and relative to the number of customers in the entire chain of shops is which kind of cost,respectively?

If a company had a pure variable cost structure,what would be the relationship between contribution margin and net income,and what would be the magnitude of operating leverage?

The following income statements are provided for Li Company's last two years of operation: $\begin{array}{lrr}&\text { Year 1}&\text { Year 2}\\\text { Number of units produced and sold } & 3,500 & 3,000 \\\text { Sales revenue } & \$ 101,500& \$ 87,000 \\\text { Cost of goods sold } & 68,000& 60,000 \\\text { Gross margin } & 33,500& 27,000 \\\text { General, selling, and administrative expenses } & 13,000& 12,00 0 \\\text { Net income } & \$ 20,500 & \$ 15,000\end{array}$ Assuming that cost behavior did not change over the two-year period,what is Li Company's contribution margin in Year 2?

Select the incorrect statement regarding the relationship between cost behavior and profits.

Multiple regression analysis should be performed when a single independent variable influences multiple dependent variables.

The activity base selected determines whether a cost behaves as a variable cost or fixed cost.

The following information is for Companies M and N for the most recent year: $\begin{array} { l l l } & \text { Company M } & \text { Company N } \\\text { Sales } & \$ 500,000 & \$ 500,000 \\\text { Variable costs } & \$ 300,000 & \$ 200,000 \\\text { Fixed costs } & \$ 50,000 & \$ 150,000\end{array}$ Based on this information,which of the following statements is incorrect?

What is a primary disadvantage of the high-low method of analyzing a mixed cost?

Phoenix Corporation manufactures smartphones,generally selling from 200,000 to 300,000 units per year.The following cost data apply to the activity levels shown: $\begin{array}{lrr}\text { Number of Units }&200,000&250,000&300,000\\ \text {Total costs } &\\ \text { Fixed} &\$15,000,000\\ \text { Variable } &\underline{24,000,000}\\ \text { Total costs } &\underline{39,000,000}\\\\ \text { Cost per Unit } &\\ \text { Fixed } &\$75\\ \text { Variable} &\underline{120}\\ \text { Total Cost per unit} &\underline{\$195,000}\\\end{array}$ Required: 1.Complete the preceding table by filling the missing amounts for 250,000 and 300,000 units. 2.Assume that Phoenix actually makes 280,000 units.What would be the total costs and the cost per unit at this level of activity? (Round the cost per unit to two decimal points.) 3.If Phoenix sells each unit for $220,what is Phoenix's magnitude of operating leverage at sales of 280,000 units? (Round to two decimal points.)