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

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Question 31

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Sandford Company manufactures one product. Its variable manufacturing cost is $16 per unit; total fixed manufacturing cost is $600,000.Required: 1.) Calculate Sandford's total manufacturing costs if it produces 10,000 units.2.) What would be the total cost per unit (including both fixed and variable costs) assuming that Sandford produces 10,000 units? 3.) Calculate Sandford's total manufacturing costs if it produces 20,000 units.4.) What would be the total cost per unit assuming that Sandford produces 20,000 units? 5.) Compare your answers from parts 2 and 4. If the cost per unit is different at 10,000 units than at 20,000 units, explain why.

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1.) Total manufacturing costs = ($16 × 1...

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Question 32

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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).

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Question 33

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Executive management at Ballard Books is very optimistic about the chain's ability to achieve significant increases in sales in each of the next five years. The company will most benefit if management creates a:

A company with a completely fixed cost structure will have operating leverage of 1.

A cost that contains both fixed and variable elements is referred to as a:

Cool Runnings operates a chain of frozen yogurt shops. The company pays $5,000 of rent expense per month for each shop. The managers of each shop are paid a salary of $3,000 per month and all other employees are paid on an hourly basis. Relative to the number of shops, the cost of rent is which kind of cost?

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?

Compare least squares regression and the scattergraph method of analyzing mixed costs.

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

Select the incorrect statement regarding cost structures.

In order to prepare a contribution format income statement, costs must be separated into:

Which of the following equations can be used to compute a firm's magnitude of operating leverage?

Based on the following operating data, the operating leverage is: $\begin{array} { | l | r | } \hline \text { Sales } & \$ \quad 500,000 \\\hline \text { Variable costs } & 280,000 \\\hline \text { Contribution margin } & 220,000 \\\hline \text { Fired costs } & 180,000 \\\hline \text { Income from operations } & \$ 40,000 \\\hline\end{array}$

What is meant by the phrase, "cost structure?"

Select from the following the incorrect statement regarding contribution margin.

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

All of the following would be considered a fixed cost for a bottled water company except:

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

How does total variable cost respond when volume increases?

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