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

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Question 21

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The records of Gemini Company show a contribution margin ratio of 40%. The company desires to earn a profit of $35,000 and has fixed costs of $70,000. What sales revenue would have to be generated in order to earn the desired profit?

A) $87,500
B) $262,500
C) $175,000
D) $42,000

E) A) and B)
F) A) and C)

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Question 22

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

A) True
B) False

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Question 23

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In 2013, Goldblum Co. sold 160,000 units of its product at a selling price of $40. The variable cost per unit was $30, and Goldblum reported net income for the year of $220,000. What was the amount of Goldblum's fixed costs for the year?

The magnitude of operating leverage for Forbes Corporation is 1.8 when sales are $200,000 and net income is $24,000. If sales increase by 5%, what is net income expected to be?

Select the correct statement from the following.

Income statements for three companies are provided below: Required: (a) Prepare new income statements for the firms assuming each sells one additional unit. (i.e. each firm sells 21 units) (b) Briefly describe the effect of cost structure on profitability.

A cost that is part selling cost and part manufacturing cost is referred to as a mixed cost.

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:

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 salespersons' commissions are an example of:

Ng Company sells one product that has a sales price of $20 per unit, variable costs of $12 per unit, and total fixed costs of $300,000. What is the amount of sales volume in dollars necessary to attain a desired profit of $100,000?

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 total cost per unit will:

How can the contribution margin ratio be used in cost-volume-profit analysis?

Based on the following operating data, the operating leverage is: $\begin{array} { l r } \text { Sales } & \$ 500,000 \\\text { Variable costs } & 280,000 \\ \text { Contribution margin } & 220,000 \\ \text { Fixed costs } & 180,000 \\ \text { Income from operations } & \$ 40,000\end{array}$

Hard Nails and Bright Nails are competing nail salons. Both companies have the same number of customers. Both charge the same price for a manicure. The only difference is that Hard Nails pays its manicurists on a salary basis (i.e., a fixed cost structure) while Bright Nails pays its manicurists on the basis of the number of customers they serve (i.e., a variable cost structure) . Both companies currently make the same amount of net income. If sales of both salons increase by an equal amount, Hard Nails:

Houston Company produces a product that sells for $175 per unit and has variable costs of $50 per unit. Houston's annual fixed costs are $200,000, and the company wishes to earn a profit of $80,000. Required: Use the equation method to determine the sales volume in units and dollars required to earn the desired profit.

When using least-squares regression to determine variable and fixed costs, the r-square refers to the degree to which the change in the dependent variable can be explained by a change in the independent variable.

The following income statements are provided for Li Company's last two years of operation: Assuming that cost behavior did not change over the two year period, what is the amount of the company's variable cost of goods sold per unit?

Based on the income statements of the three following retail businesses, which company has the highest operating leverage? $\begin{array}{|l|r|r|r|}\hline & \text { Alpha Company } & \text { Beta Company } & \text { Gamma Company } \\\hline \text { Revenue } & \$ 200,000 & \$ 200,000 & \$ 200,000 \\\hline \text { Variable costs } & (95,000) & (155,000) & (125,000) \\\hline \text { Contribution margin } & \$ 105,000 & \$ 45,000 & \$ 75,000 \\\hline \text { Fixed costs } & (80,000) & (20,000) & (50,000) \\\hline \text { Net income } & \$ 25,000 & \$ 25,000 & \$ 25,000 \\\hline\end{array}$

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.

Production in 2013 for California Manufacturing, a producer of high security bank vaults, was at its highest point in the month of June when 80 units were produced at a total cost of $800,000. The lowest point in production was in January when only 20 units were produced at a cost of $440,000. The company is preparing a budget for 2013 and needs to project expected fixed cost for the budget year. Using the high/low method, the projected amount of fixed cost per month is: