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

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Question 31

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Larry's Lawn Care incurs significant gasoline costs. This cost would be classified as a variable cost if the total gasoline cost:

A) varies inversely with the number of hours the lawn equipment is operated.
B) is not affected by the number of hours the lawn equipment is operated.
C) increases in direct proportion to the number of hours the lawn equipment is operated.
D) none of these.

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

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Question 32

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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.

A) True
B) False

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Question 33

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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?

Blackstock Company manufactures digital cameras. Indicate whether the cost is a product cost or period cost AND 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 a period cost and variable.

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:

A company can use target profit analysis to determine the level of sales required to earn a target loss.

Whether a cost behaves as a fixed cost or as a variable cost depends upon the:

Burke Company has a break-even of $600,000 in total sales. Assuming the company sells its product for $50 per unit, what is its margin of safety in units if sales total $850,000?

An advantage of using the scatter graph method over the high-low method is that all points of data are used in determining the cost line.

For a mixed cost, total cost increases in direct proportion to volume.

How can contribution margin per unit be used to find the break-even point in units?

For 2013, Fairview Corporation sold 100,000 units of its product for $20 each. The variable cost per unit was $14, and Fairview's margin of safety was 40,000 units. What was the amount of Fairview's total fixed costs?

Kingston Company sells its product for $200 per unit. The company's accountant provided the following cost information: $\begin{array} { | l | l | } \hline \text { Manufacturing costs } & \$ 25,000 + 40 \% \text { of sales } \\\hline \text { Selling costs } & \$ 10,000 + 20 \% \text { of sales } \\\hline \text { Administrative costs } & \$ 15,000 + 10 \% \text { of sales } \\\hline\end{array}$ What is Kingston Company's contribution margin ratio?

What does the margin of safety measure?

Write an equation for each item provided: Contribution margin per unit = _____________ Contribution margin ratio = ______________ Break-even in units = ______________ Break-even in dollars = ______________ Units required to achieve desired profit = ______________ Dollars required to achieve desired profit = ______________ Margin of safety ratio = ______________

How does total variable cost respond when volume increases?

Based on the following cost data, what conclusions can you make about Product A and Product B? $\text { Total Cost }$ $\begin{array}{|l|r|c|}\hline \text { Production: } &{\text { Product A }} & \text { Product B } \\\hline 10 \text { units } & \$ 100 & ? \\\hline 100 \text { units } & \$ 1,000 & ? \\\hline 1,000 \text { units } & \$ 10,000 & ? \\\hline\end{array}$ $\text { Unit Cost }$ $\begin{array}{|l|c|r|}\hline \text { Production: } & \text { Product A } & \text { Product B } \\\hline 10 \text { units } & ? & \$ 10,000 \\\hline 100 \text { units } & ? & \$ 1,000 \\\hline 1,000 \text { units } & ? & \$ 100 \\\hline\end{array}$

The magnitude of operating leverage for Perkins Corporation is 4.5 when sales are $100,000. If sales increase to $110,000, profits would be expected to increase by what percent?

For 2013, 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?

One way that computing an average cost per unit facilitates management decision making is that managers are provided more timely and more relevant cost information.