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

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Question 1

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Why would a company often calculate and use average costs of its products and services rather than actual costs?

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When a company provides many products or services that are similar,calculating the actual cost of each might be difficult and expensive and of little benefit.Average costs may be used in setting the price to charge customers and in evaluating performance and making other managerial decisions.

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Describe the format of an income statement prepared using the contribution margin approach.

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An income statement that uses the contri...

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Describe the steps in the high-low method.

What are mixed or semivariable costs? Give an example of a mixed cost.

The total variable cost increases in direct proportion to volume.

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:

What is meant by the phrase,"relevant range"? How does the concept of relevant range affect fixed costs?

The contribution margin format income statement is not widely used for external financial reporting,but is allowed by GAAP.

Select the incorrect statement regarding the relevant range of volume.

The following information is provided for Southall Company: $\begin{array}{lr}\text { Sales revenue } & \$ 125,000 \\\text { Variable manufacturing costs } & 42,500 \\\text { Fixed manufacturing costs } & 37,500 \\\text { Variable selling and administrative costs } & 15,000 \\\text { Fixed selling and administrative costs } & 12,500\end{array}$ What is this company's contribution margin?

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.

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?

Craft,Inc.normally produces between 120,000 and 150,000 units each year.Producing more than 150,000 units alters the company's cost structure.For example,fixed costs increase because more space must be rented,and additional supervisors must be hired.The production range between 120,000 and 150,000 is called the:

Based on the following cost data,what conclusions can you make about the costs of Product A and Product B? $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Total Cost }$ $\begin{array}{lrrr}\text { Production: } & \text { Product A } & \text { Product B } \\10 \text { units } & \$ 100 & ? \\100 \text { units } & \$ 1,000& ? \\1,000 \text { units } & \$ 10,000& ?\end{array}$ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Unit Cost }$ $\begin{array}{rr}\text {Production:}&\text { Product A } & \text { Product B } \\\text { 10 units}&? & \$ 10,000 \\\text { 100 units}&? & \$ 1,000 \\\text { 1,000 units}&? & \$ 100\end{array}$

What is the high-low method used for?

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

Companies with low operating leverage will experience lower profits when sales increase than will companies with higher operating leverage.

Potential problems associated with cost averaging can be reduced by averaging the cost over a shorter span of time.

Operating leverage enables a company to convert small changes in fixed costs into dramatic changes in profitability.

Select the correct statement regarding fixed costs.