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

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Question 1

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

A) $12,000
B) $24,000
C) $26,000
D) none of these

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

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Question 2

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

A) True
B) False

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Question 3

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If revenues are expected to decline,management should attempt to convert its variable costs into fixed costs.

Complete the following table to indicate your understanding of fixed and variable cost behavior by inserting one of the following responses in each box: "Remain constant," "Increase," or "Decrease." $\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { When Activity } \\\text { Increases }\end{array} & \begin{array} { l } \text { When Activity } \\\text { Decre ase s }\end{array} \\\hline \text { Unit fixed costs } & & \\\hline \text { Total fixed costs } & & \\\hline \text { Unit variable costs } & & \\\hline \text { Total variable costs } & & \\\hline\end{array}$

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

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

Production during the current year 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 the current year 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:

How does variable cost per unit behave when volume decreases?

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. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ Cost Behavior $\begin{array} { | l | l | l | l | } \hline \text { Cost } & \text { Fixed } & \text { V ariable } & \text { Mixed } \\\hline \text { Insur ance on executive offices } & & & \\\hline \text { Lens caps for digital cameras } & & & \\\hline \text { Depreciation on manuf acturing equipment } & & & \\\hline \text { Shipping cost to defiver products to customers } & & & \\\hline \text { Salary of compary president } & & & \\\hline \text { Wages of assembly workers } & & & \\\hline \text { Product advertising } & & & \\\hline \begin{array} { l } \text { Utilities: electricity to nun machines and for } \\\text { heat and lights in factory }\end{array} & & & \\\hline\end{array}$

What is operating leverage,and how does a company achieve operating leverage?

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

Risk refers to the possibility that sacrifices may exceed benefits.

Yankee Tours provide seven-day guided tours along the New England coast.The company pays its guides a total of $100,000 per year.The average cost of supplies,lodging and food per customer is $500.The company expects a total of 500 customers during the period January through June,and a total of 1,500 customers from July through December.Yankee wants to earn $100 income per customer.For promotional reasons the company desires to charge the same price throughout the year.Based on this information,what is the correct price per customer? (round to nearest dollar)

If a company shifts its cost s

If a profitable company has both fixed and variable costs,its operating leverage will always be greater than 1.

In the graph below,which depicts the relationship between units produced and total cost,the dotted line depicts which type of total cost?

The following income statements are provided for two companies operating in the same industry: $\begin{array}{c}\begin{array}{|l|}\hline\\\hline \text {Reverue}\\\hline \text {Variable costs}\\\hline \text {Contribution margin}\\\hline \text {Fixed costs}\\\hline \text {Net income}\\\hline\end{array}\begin{array}{l|}\hline\text { Felix Company }\\\hline\$ 200,000 \\\hline (25,000) \\\hline 175,000 \\\hline (70,000) \\\hline \$ 105,000\\\hline \end{array}\begin{array}{l|}\hline\text { Jinx Compeny }\\\hline\$ 200,000 \\\hline (70,000) \\\hline 130,000 \\\hline(25,000) \\\hline \$ \quad 105,000\\\hline \end{array}\end{array}$ Assuming sales increase by $1,000,select the correct statement from the following:

A company with a completely fixed cost s

Within the relevant range,the fixed cost per unit can be expected to decrease with increases in volume.

Fixed cost per unit: