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

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Question 61

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

A) M's magnitude of operating leverage was lower than N's.
B) N would suffer more than M from an equal drop in sales revenue.
C) N's cost structure carries greater risk and greater potential for profit.
D) If N's sales increased by 20%, its net income would increase by 40%.

E) A) and C)
F) None of the above

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Question 62

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Frazier Company sells women's ski jackets. The average sales price is $275 and the variable cost per jacket is $175. Fixed Costs are $1,350,000. If Frazier sells 15,000 jackets, the contribution margin will be:

A) $2,775,000
B) $1,500,000
C) $2,250,000
D) $150,000

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

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Question 63

Multiple Choice

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If the company's volume doubles, the company's total cost will:

Java Joe operates a chain of coffee shops. The company pays rent of $20,000 per year for each shop. Supplies (napkins, bags and condiments) are purchased as needed. The manager of each shop is paid a salary of $3,000 per month, and all other employees are paid on an hourly basis. Relative to the number of customers for a shop, the cost of supplies is which kind of cost?

For Rock Creek Bottling Company, the cost of the salespersons' commissions is an example of:

For Marvin Company, the magnitude of operating leverage was 3.5 during the current year. Demonstrate what this magnitude of operating leverage would mean for the company's profitability by creating an example.

The variable cost per unit increases in direct proportion to the activity base.

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

If the company's volume increases to 5,000 units, the total cost per unit will be:

The BRC Company is considering the introduction of a new line of high end electronics. Because there is considerable uncertainty with regard to the demand for the products, the company would probably be served better by a variable cost structure.

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

If the company's volume increases to 5,000 units, the company's total costs will be:

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 following income statement was produced when volume of sales was at 400 units. $\begin{array} { | l | l r | } \hline \text { Sales Revenue } & \$ & 2,000 \\\hline\text { Variable Cost } & & 1,200 \\\hline \text { Contribution Margin } & \$ & 800 \\\hline\text { Fixed Cost } & & 300 \\\hline \text { Net Income } & \$ & 500 \\\hline\end{array}$ If volume reaches 500 units, net income will be:

Assuming that cost behavior did not change over the two-year period, what is the annual amount of the company's fixed manufacturing overhead?

If the company's volume doubles, the total cost per unit will:

Based on the above data, which company has a higher operating leverage?

The contribution margin format income statement classifies costs according to their behavior patterns.

Southern Food Service operates six restaurants in the Atlanta area. The company pays rent of $20,000 per year for each shop. The managers of each shop are paid a salary of $4,200 per month and all other employees are paid on an hourly basis. Relative to the number of hours worked, total compensation cost for a particular shop is which kind of cost?

Assuming that cost behavior did not change over the two-year period, what is Li Company's contribution margin in Year 2?