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

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Question 81

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

A) (a) = $3.00; (b) = $3.00
B) (a) = $5.00; (b) = $4.00
C) (a) = $2.50; (b) = $2.00
D) (a) = $5.00; (b) = $2.00

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

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Question 82

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Select the correct statement regarding the contribution margin ratio.

A) The contribution margin ratio can be calculated using either total amounts or per unit amounts.
B) The contribution margin ratio equals contribution margin per unit divided by variable cost per unit.
C) Total fixed costs divided by the contribution margin ratio equals the break-even point in units.
D) An increase in variable cost per unit will cause the contribution margin ratio to increase.

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

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Question 83

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What is the formula for calculating contribution margin ratio?

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

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 - 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)

Lex Company produces products that it sells for $10 each. Variable costs per unit are $4, and annual fixed costs are $120,000. Required: Use the equation method to determine the break-even point in units and dollars.

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

When computing the break-even point in units, a company should round to the next whole unit because partial units ordinarily are not sold.

When selecting the high and low observations under the high-low method of analyzing mixed costs, the selection should be based on the dependent variable (cost).

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

How is operating leverage related to cost structure?

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 production manager's salary is an example of:

Select the incorrect statement regarding the relevant range of volume.

Contribution margin can only be determined if costs are separated into product and period costs.

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

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

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 increases to 5,000 units, the total cost per unit will be:

For Marvin Company in 2013, the magnitude of operating leverage was 3.5. Demonstrate what this magnitude of operating leverage would mean for the company's profitability by creating an example.

The following income statement is provided for Ramirez Company in 2013: \begin{array} { l } \text {Sales revenue ( 2,500 units \mathrm{x} \$ 40 per unit) } &\$100,000\\ \text {Cost of goods sold (varable; 2,500 units \( \mathrm{x} \$ 16 \) per unit) } &40,000\\ \text { Cost of goods sold (fixed) } &8,000\\ \text { Gross margin} &52,0000\\ \text { Administrative salaries} &12,000\\ \text {Depreciation } &8,000\\ \text {Supplies (2,500 units x \$4 per unit) } &10,000\\ \text { Net income} &\$22,000\\\end{array} What amount was the company's contribution margin?

A disadvantage of the high-low method is that the high point and low point may not be representative of the total data set available.