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

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Question 31

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A cost that is considered variable for one activity base may be considered fixed for a different activity base.

A) True
B) False

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Question 32

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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 the above.

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

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Question 33

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Select the incorrect statement regarding cost s

Select the correct statement regarding fixed costs.

Assume that the management of Dairy Deli wants to expand operations. To help evaluate the risks involved in opening an additional store, the company president wants to know the amount of fixed cost a new store will likely incur. Management uses the regression method to analyze the company’s mixed costs. In terms of interpreting the results:

Which of the following costs typically include both fixed and variable components?

Variable costs will become fixed outside the relevant range.

Based on the following cost data,items labeled (a) and (b) in the table below are which of the following amounts,respectively? $\begin{array}{|l|r|r|}\hline \text { Number of units: } & 1,500 & 3,000 \\\hline \text { Total cost: } & & \\\hline \text { Vanable } & \$ 7,500 & \$ 15,000 \\\hline \text { Fixed } & \$ 6,000 & \$ 6,000 \\\hline & & \\\hline \text { Cost per unit: } & & \\\hline \text { Vanable } & \$ 5 & \text { (a) } \\\hline \text { Fixed } & \$ 4 & \text { (b) } \\\hline\end{array}$

The following income statement is provided for Grant,Inc. $\begin{array}{c}\begin{array}{|l|}\hline \text {Sales revenue (1,500(a, \$ 30 per unit) }\\\hline \text {Variable costs \( (1,500 @ \$ 14 \) per unit) }\\\hline \text {Fixed costs}\\\hline \text {Net income}\\\hline \end{array}\begin{array}{r|}\hline\$ 55,000 \\\hline21,000 \\\hline16,000 \\\hline \$ \quad 8,000\\\hline \end{array}\end{array}$ What is this company's magnitude of operating leverage?

How is operating leverage related to cost s

Contribution margin income statements for two competing companies are provided below: $\begin{array}{c}\begin{array}{|l|}\hline \\\hline \text {Revenue}\\\hline \text {Less variable costts}\\\hline \text {Contribution margin}\\\hline \text {Less fixed costs}\\\hline \text {Net income}\\\hline \end{array}\begin{array}{l|}\hline \text { Yin Company }\\\hline \$ 750,000 \\\hline 300,000 \\\hline \$ 450,000 \\\hline 405,000 \\\hline \$ 45,000\\\hline\end{array}\begin{array}{l|}\hline\text { Yang Company }\\\hline \$ 750,000 \\\hline 525,000 \\\hline \$ 225,000 \\\hline 180,000 \\\hline \$ 45,000\\\hline\end{array}\end{array}$ Required: 1)Show each company's cost s

The following income statement is provided for Vargas,Inc. $\begin{array} { | l | r | } \hline \text { Sales reverue } ( 2,500 \text { urits } \mathrm { x } \$ 60 \text { per urit) } & \$ 150,000 \\\hline \text { Cost of goods sold (varable; } 2,500 \text { urits } \times \$ 20 \text { per urit) } & ( 50,000 ) \\\hline \text { Cost of goods sold (fived) } & ( 8,000 ) \\\hline \text { Gross margin } & 92,000 \\\hline \text { Admiristrative salaries } & ( 42,000 ) \\\hline \text { Depreciation } & ( 10,000 ) \\\hline \text { Supplies } ( 2500 \text { units } \times \$ 4 \text { per urit) } & ( 10,000 ) \\\hline \text { Net income } & \$ 30,000\\\hline \end{array}$ What is this company's magnitude of operating leverage?

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

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?

Select the correct statement from the following.

How does total variable cost respond when volume increases?

What is an activity base,and how does the activity base relate to a variable cost?

Income statements for three companies are provided below: $\begin{array}{c}\begin{array}{|l|}\hline\\\hline \text {Sales (20 urits)}\\\hline \text {Less variable costs}\\\hline \text {Less fixed costs}\\\hline \text {Net income}\\ \hline \end{array}\begin{array}{l|}\hline\text { Company A }\\\hline\$1,000\\\hline600\\\hline200\\\hline\$200\\\hline \end{array}\begin{array}{l|}\hline\text { Company B }\\\hline\$1,000\\\hline300\\\hline500\\\hline\$200\\\hline\end{array}\begin{array}{l|}\hline\text { Company C }\\\hline\$1,000\\\hline-\\\hline800\\\hline\$200\\\hline\end{array}\end{array}$ 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 s

The higher the magnitude of a company's operating leverage,the more benefit the company will receive from a given percentage increase in revenue.

As activity increases,the fixed cost per unit increases while the variable cost per unit remains constant.