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

Question 1

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 company's total costs will be:

A) $100,000
B) $90,000
C) $102,500
D) $80,000

Answer 1

C

Question 2

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:

A) $18.00.
B) $20.00.
C) $20.50.
D) $22.50.

Answer 2

C

Question 3

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

A) Variable cost
B) Fixed cost
C) Mixed cost
D) None of these

Answer 3

A

Question 4

Select the correct statement regarding fixed costs.

A) Because they do not change, fixed costs should be ignored in decision making.
B) The fixed cost per unit decreases when volume increases.
C) The fixed cost per unit increases when volume increases.
D) The fixed cost per unit does not change when volume decreases.

Question 5

Pickard Company pays its sales staff a base salary of $4,500 a month plus a $3.00 commission for each product sold.If a salesperson sells 800 units of product in January,the employee would be paid:

A) $6,900.
B) $4,500.
C) $2,300.
D) $2,700.

Question 6

Two different costs incurred by Ruiz Company exhibit the following behavior pattern per unit: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Unit Sold }$
$\begin{array}{lrr}&50&100&150&200\\ \text {Cost \#1 } & \text {\$ 300 Per unit} & \text { \$ 150 Per unit }& \text { \$ 100 Per unit}&\text { \$ 75 Per unit} \\ \text {Cost\#2 } & \text { \$ 2 Per unit}&\text { \$ 2 perunit}&\text { \$ 2 perunit}&\text { \$ 2 perunit}\\\end{array}$
Cost #1 and Cost #2 exhibit which of the following cost behavior patterns,respectively?

A) Fixed and variable
B) Variable and variable
C) Fixed and fixed
D) Variable and fixed

Question 7

Fixed cost per unit:

A) decreases as production volume decreases.
B) is not affected by changes in the production volume.
C) decreases as production volume increases.
D) increases as production volume increases.

Question 8

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:

A) a variable cost.
B) a mixed cost.
C) a fixed cost.
D) None of these

Question 9

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 doubles,the company's total cost will:

A) stay the same.
B) double as well.
C) increase but will not double.
D) decrease.

Question 10

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 doubles,the total cost per unit will:

A) stay the same.
B) decrease.
C) double as well.
D) increase but will not double.

Question 11

Java Joe operates a chain of coffee shops.The company pays rent of $20,000 per year for each shop.Supplies (napkins,bags,and condiments)are purchased as needed.The manager of each shop is paid a salary of $3,000 per month,and all other employees are paid on an hourly basis.Relative to the number of customers for a shop,the cost of supplies is which kind of cost?

A) Fixed cost
B) Variable cost
C) Mixed cost
D) Relevant cost

Question 12

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 these are correct.

Question 13

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 }$
$\begin{array}{rr}\text {Production:}&\text { Product A } & \text { Product B } \\\text { 10 units}&? & \$ 10,000 \\\text { 100 units}&? & \$ 1,000 \\\text { 1,000 units}&? & \$ 100\end{array}$

A) The cost of Product A is a fixed cost and the cost of Product B is a variable cost.
B) The cost of Product A is a variable cost and the cost of Product B is a fixed cost.
C) The costs of Product A and Product B are both variable costs.
D) The costs of Product A and Product B are both mixed costs.

Question 14

Hard Nails and Bright Nails are competing nail salons.Both companies have the same number of customers.Both charge the same price for a manicure.The only difference is that Hard Nails pays its manicurists on a salary basis (i.e.,a fixed cost structure)while Bright Nails pays its manicurists on the basis of the number of customers they serve (i.e.,a variable cost structure).Both companies currently make the same amount of net income.If sales of both salons increase by an equal amount,Hard Nails:

A) will earn a higher profit than Bright Nails.
B) will earn a lower profit than Bright Nails.
C) will earn the same amount of profit as Bright Nails.
D) The answer cannot be determined from the information provided.

Question 15

Select the correct statement regarding fixed costs.

A) There is a contradiction between the term "fixed cost per unit" and the behavior pattern implied by the term.
B) Fixed cost per unit is not fixed.
C) Total fixed cost remains constant when volume changes.
D) All of these are correct statements.

Question 16

Quick Change and Fast Change are competing oil change businesses.Both companies have 5,000 customers.The price of an oil change at both companies is $20.Quick Change pays its employees on a salary basis,and its salary expense is $40,000.Fast Change pays its employees $8 per customer served.Suppose Quick Change is able to lure 1,000 customers from Fast Change by lowering its price to $18 per vehicle.Thus,Quick Change will have 6,000 customers and Fast Change will have only 4,000 customers. Select the correct statement from the following.

A) Quick Change's profit will increase while Fast Change's profit will fall.
B) Fast Change's profit will fall but it will still earn a higher profit than Quick Change.
C) Profits will decline for both Quick Change and Fast Change.
D) Quick Change's profit will remain the same while Fast Change's profit will decrease.

Question 17

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

A) Variable cost
B) Fixed cost
C) Mixed cost
D) None of these

Question 18

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

A) Variable cost
B) Fixed cost
C) Mixed cost
D) None of these

Question 19

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 cost of the salespersons' commissions is an example of:

A) a fixed cost.
B) a variable cost.
C) a mixed cost.
D) none of these

Question 20

Based on the following cost data,items labeled (a)and (b)in the table below are which of the following amounts,respectively? $\begin{array}{lrr} \text { Number of units: } &1,500&3,000\\ \text { Total cost: } &\\ \text { Variable} &\$7,500&\$15,00\\ \text { Fixed} &\$6,000&\$6,000\\\\ \text { Cost per unit:} &\\ \text { Variable } &\$5&(a)\\ \text { Fixed }&\$4&(b)\end{array}$

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

Question 21

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) low operating leverage cost structure.
B) medium operating leverage cost structure.
C) high operating leverage cost structure.
D) no operating leverage cost structure.

Question 22

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

A) manufacturing and selling, general, and administrative costs.
B) cost of goods sold and operating expenses.
C) variable and fixed costs.
D) mixed, variable and fixed costs.

Question 23

Companies A and B are in the same industry and are identical except for cost structure.At a volume of 50,000 units,the companies have equal net incomes.At 60,000 units,Company A's net income would be substantially higher than B's.Based on this information,

A) Company A's cost structure has more variable costs than B's.
B) Company A's cost structure has higher fixed costs than B's.
C) Company B's cost structure has higher fixed costs than A's.
D) At a volume of 50,000 units, Company A's magnitude of operating leverage was lower than B's.

Question 24

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

A) A pure variable cost structure offers higher potential rewards.
B) A pure fixed cost structure offers more security if volume expectations are not achieved.
C) In a pure variable cost structure, when revenue increases by $1, so do profits.
D) In a pure fixed cost structure, the unit selling price and unit contribution margin are equal.

Question 25

The excess of revenue over variable costs is referred to as:

A) gross profit
B) gross margin
C) contribution margin
D) manufacturing margin

Question 26

The following income statements are provided for two companies operating in the same industry: $\begin{array}{c}\begin{array}{l}\\\text {Revenue}\\ \text {Variable costs}\\\text { Contribution margin }\\\text {Fixed costs}\\ \text {Net income}\\\end{array} \begin{array}{lll}\text { Felix Company }\\\$200,000\\(25,000)\\175,000\\(70,000)\\\$105,000 \end{array}\begin{array}{c}\text {Jinx Company}\\\$ 200,000 \\ (70,000) \\130,000 \\ (25,000) \\ \$ 10 5,000\end{array}\end{array}$
Assuming sales increase by $1,000,select the correct statement from the following:

A) Felix's net income will be more than Jinx's.
B) Only Felix will experience an increase in profit.
C) Felix's net income will increase by $250.
D) Jinx's net income will increase by 6%.

Question 27

The manager of Kenton Company stated that 45% of its total costs were fixed.The manager was describing the company's:

A) operating leverage.
B) contribution margin.
C) cost structure.
D) cost averaging.

Question 28

Select the incorrect statement regarding the contribution margin income statement.

A) The contribution margin approach for the income statement is unacceptable for external reporting.
B) Contribution margin represents the amount available to cover product costs and thereafter to provide profit.
C) The contribution margin approach requires that all costs be classified as fixed or variable.
D) Assuming no change in fixed costs, a $1 increase in contribution margin will result in a $1 increase in profit.

Question 29

Which of the following items would not be found on a contribution format income statement?

A) Fixed cost
B) Variable cost
C) Gross margin
D) Net income

Question 30

For the last two years BRC Company had net income as follows: $$\begin{array} { | l | c | c | } \hline & \text { Year 1 } & \text { Year 2 } \\\hline \text { Net Income } & \$ 160,000 & \$ 200,000 \\\hline\end{array}$$ What was the percentage change in income from Year 1 to Year 2?

A) 20% increase
B) 20% decrease
C) 25% increase
D) 25% decrease

Question 31

Select the incorrect statement regarding cost structures.

A) Highly leveraged companies will experience greater profits than companies less leveraged when sales increase.
B) The more variable cost, the higher the fluctuation in income as sales fluctuate.
C) When sales change, the amount of the corresponding change in income is affected by the company's cost structure.
D) Faced with significant uncertainty about future revenues, a low leverage cost structure is preferable to a high leverage cost structure.

Question 32

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?

A) $30,000
B) $17,500
C) $45,000
D) $67,500

Question 33

Select the correct statement from the following.

A) A fixed cost structure offers less risk (i.e., less earnings volatility) and higher opportunity for profitability than does a variable cost structure.
B) A variable cost structure offers less risk and higher opportunity for profitability than does a fixed cost structure.
C) A fixed cost structure offers greater risk but higher opportunity for profitability than does a variable cost structure.
D) A variable cost structure offers greater risk but higher opportunity for profitability than does a fixed cost structure.

Question 34

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

A) $50,000
B) $22,000
C) $52,000
D) $60,000

Question 35

Select from the following the incorrect statement regarding contribution margin.

A) Sales − Fixed costs = Contribution margin
B) Net income + Total fixed costs = Contribution margin
C) At the breakeven point (where the company has neither profit nor loss), Total fixed costs = Total contribution margin
D) Total sales revenue times the contribution margin percentage = Total contribution margin

Question 36

Operating leverage exists when:

A) a company utilizes debt to finance its assets.
B) management buys enough of the company's shares of stock to take control of the corporation.
C) the organization makes purchases on credit instead of paying cash.
D) small percentage changes in revenue produce large percentage changes in profit.

Question 37

The activity director for City Recreation is planning an activity.She is considering alternative ways to set up the activity's cost structure.Select the incorrect statement from the following.

A) If the director expects a low turnout, she should use a fixed cost structure.
B) If the director expects a large turnout, she should attempt to convert variable costs into fixed costs.
C) If the director shifts the cost structure from fixed to variable, the level of risk decreases.
D) If the director shifts the cost structure from fixed to variable, the potential for profits will be reduced.

Question 38

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?

A) Variable cost
B) Fixed cost
C) Mixed cost
D) Opportunity cost

Question 39

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

A) Net income ÷ sales
B) Fixed costs ÷ contribution margin
C) Contribution margin ÷ net income
D) Net income ÷ contribution margin

Question 40

Based on the income statements shown below,which division has the cost structure with the highest operating leverage? $\begin{array}{c}\begin{array}{l}\\\text {Revenue}\\ \text {Variable costs}\\\text { Contribution margin }\\\text {Fixed costs}\\ \text {Net income}\\\end{array} \begin{array}{lll}\text { Soft Drinks }\\\$50,000\\(10,000)\\40,000\\(30,000)\\\%10,000 \end{array}\begin{array}{c}\text { Bottled Water }\\\$ 50,000 \\ (5,000) \\ 45,000 \\ (40,000) \\ \$ 5,000\end{array}\begin{array}{lll}\text { Fruit Juices }\\\$50,000\\(30,000)\\20,000\\(10,000)\\\$10,000\end{array}\end{array}$

A) Bottled Water.
B) Fruit Juices.
C) Soft Drinks.
D) The three divisions have identical operating leverage.

Question 41

The following income statement is provided for Grant,Inc. $$\begin{array} { l r } \text { Sales revenue (1,500@\$30per unit) } & \$ 45,000 \\\text { Variable costs } ( 1,500 @ \$ 14 \text { per unit) } & 21,000 \\\text { Fixed costs } & \underline{ 16,000} \\\text { Net incorne }& \underline{\$ 8,000 }\\\end{array}$$ What is this company's magnitude of operating leverage?

A) 0.33
B) 1.31
C) 2.00
D) 3.00

Question 42

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:

A) $120,000
B) $320,000
C) $480,000
D) $360,000

Question 43

Mug Shots operates a chain of coffee shops.The company pays rent of $15,000 per year for each shop.Supplies (napkins,bags,and condiments)are purchased as needed.The managers of each shop are paid a salary of $2,500 per month and all other employees are paid on an hourly basis.The cost of rent relative to the number of customers in a particular shop and relative to the number of customers in the entire chain of shops is which kind of cost,respectively?

A) Variable cost and fixed cost
B) Fixed cost and fixed cost
C) Fixed cost and variable cost
D) Variable cost and variable cost

Question 44

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?

A) Mixed cost
B) Fixed cost
C) Variable cost
D) None of these

Question 45

Select the incorrect statement regarding the use of average unit costs.

A) Average costs should be calculated for a sufficiently long time period to capture seasonal fluctuations in costs.
B) Average costs are often more relevant for decision making than are actual costs.
C) Average cost information can help managers evaluate performance of the company or departments in the company.
D) Cost averaging should be used only for fixed costs, and not for variable costs.

Question 46

The following information is given regarding driving lessons provided by Arrive Alive Company over several spans of time: $$\begin{array} { l r r r } & & { \text { Length of Tine } } \\& \text { TODAY } & \text { ONE YEAR } & \text { FIVE YEARS } \\\text { Total cost of lessons } & \$ 600 & \$ 110,000 & \$ 508,000 \\\text { Number of lessons } & 50 & 10,000 & 55,000\end{array}$$ Select the incorrect statement from the following.

A) The average cost per lesson over the five-year period was $9.24.
B) Based on the most current information, the cost per lesson was $12.00.
C) The average cost based on the total five-year period is probably the most appropriate cost for pricing purposes.
D) The selection of the most appropriate time span for calculating the average cost often requires considerable judgment.

Question 47

What are the expected average quarterly costs of running a consulting practice if fixed costs are expected to be $4,000 a month and variable costs are expected to be $100 per client for each quarter? Expected number of clients for the year are: $$\begin{array} { | c | c | c | c | } \hline \text { Jan-March } & \text { April-June } & \text { July-Sep } & \text { Oct-Dec } \\\hline 110 & 140 & 150 & 100 \\\hline\end{array}$$

A) $12,500
B) $24,500
C) $16,500
D) $19,500

Question 48

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

A) mixed cost.
B) hybrid cost.
C) relevant cost.
D) nonvariable cost.

Question 49

Based on the income statements of the three following retail businesses,which company has the highest operating leverage? $\begin{array}{c}\begin{array}{l}\\\\\text {Revenue}\\ \text {Variable costs}\\\text { Contribution margin }\\\text {Fixed costs}\\ \text {Net income}\\\end{array} \begin{array}{lll}\text { Alpha}\\\text { Company}\\200,000 \\(95,000)\\\$ 105,000 \\(80,000) \\\$ 25,000\end{array}\begin{array}{c}\\\text { Beta Company } \\\$ 200,000 \\ (155,000) \\\$ 45,000 \\ (20,000) \\ \$ 25,000\end{array}\begin{array}{cc}\text { Gamma}\\\text { Company}\\\$ 200,000 \\ (125,000) \\ \$ 75,000 \\ (50,000) \\\$ 25,000\end{array}\end{array}$

A) Alpha Company
B) Beta Company
C) Gamma Company
D) They all have same operating leverage

Question 50

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?

A) 4.5%
B) 14.5%
C) 45%
D) 10%

Question 51

Whether a cost behaves as a fixed cost or as a variable cost depends upon the:

A) activity based used.
B) cost structure of the company.
C) industry.
D) significance of the dollar amount of the cost.

Question 52

The following income statement is provided for Vargas,Inc. $$\begin{array} { l r } \text { Sales reverule (2,500 urits } \times \$ 60 \text { per unit) } & \$ 150,000 \\\text { Cost of goods sold (variable; } 2,500 \text { urits } \times \$ 20 \text { per unit) } & ( 50,000 ) \\\text { Cost of goods sold (fixed) } & \underline{ ( 8,000 )} \\\text { Gross margin } & 92,000 \\\text { Adrninistrative salaries } & ( 42,000 ) \\\text { Depreciation } & ( 10,000 ) \\\text { Supplies } ( 2,500 \text { urits } \times \$ 4 \text { per unit) } & \underline{( 10,000 )} \\\text { Net income } & \underline{ \$ 30,000} \\\end{array}$$ What is this company's magnitude of operating leverage?

A) 3.07
B) 0.33
C) 3.00
D) 1.67

Question 53

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 your answer to the nearest dollar.)

A) $450
B) $500
C) $650
D) $700

Question 54

Wham Company sells electronic squirrel repellants for $60.Variable costs are 60% of sales and total fixed costs are $40,000.What is the firm's magnitude of operating leverage if 2,000 units are sold?

A) 0.17
B) 6.00
C) 2.25
D) None of these

Question 55

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:

A) differential range.
B) median range.
C) relevant range.
D) leverage range.

Question 56

The following income statements are provided for Li Company's last two years of operation: $\begin{array}{lrr}&\text { Year 1}&\text { Year 2}\\\text { Number of units produced and sold } & 3,500 & 3,000 \\\text { Sales revenue } & \$ 101,500& \$ 87,000 \\\text { Cost of goods sold } & 68,000& 60,000 \\\text { Gross margin } & 33,500& 27,000 \\\text { General, selling, and administrative expenses } & 13,000& 12,00 0 \\\text { Net income } & \$ 20,500 & \$ 15,000\end{array}$ 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?

A) $12.00 per unit
B) $16.00 per unit
C) $22.00 per unit
D) None of these

Question 57

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

A) Direct materials
B) Direct labor
C) Factory overhead
D) None of these

Question 58

The magnitude of operating leverage for Blue Ridge Corporation is 3.5 when sales are $200,000 and net income is $36,000.If sales decrease by 6%,net income is expected to decrease by what amount?

A) $2,160
B) $7,560
C) $3,420
D) $1,260

Question 59

The magnitude of operating leverage for Forbes Corporation is 1.8 when sales are $200,000 and net income is $24,000.If sales increase by 5%,what is net income expected to be?

A) $25,200
B) $26,160
C) $24,667
D) $43,200

Question 60

Select the incorrect statement regarding the relevant range of volume.

A) Total fixed costs are expected to remain constant.
B) Total variable costs are expected to vary in direct proportion with changes in volume.
C) Variable cost per unit is expected to remain constant.
D) Total cost per unit is expected to remain constant.

Question 61

$\begin{array}{lrr} \text { Units sold } &20&40&60\\ \text {Total salary cost } &\$6,000&\$7,800&\$9,200\\ \text { Total cost of goods sold } &14,000&28,000&42,000\\ \text { Depreciation cost per unit} &\$120&\$60&\$40\\\end{array}$
Based on the above information,select the correct statement.

A) Cost of goods sold is a mixed cost.
B) Salary cost is a mixed cost.
C) Depreciation cost is a variable cost.
D) If the company sells 20 units for $540 each, it will incur a loss of $200.

Question 62

The following information is for Gable,Inc.and Harlowe,Inc.for the recent year. $$\begin{array} { l r r r } & \text { Gable, Inc. } & \text { Harlowe, Inc. } \\\text { Sales } & \$ 800,000 & \$ 800,000 \\\text { Variable costs } & \underline{ 400,000 }& \underline{200,000 }\\\text { Contribution margin } & 400,000 & 600,000 \\\text { Fixed costs } & \underline{200,000 } & \underline{ 400,000} \\\text { Income from operations }& \underline{ \$ 200,000 }& \underline{ \$ 200,000}\end{array}$$ What total amount of net income will Harlowe,Inc.earn if it experiences a 10 percent increase in revenue?

A) $180, 000
B) $80,000
C) $260,000
D) $20,000

Question 63

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

A) 0.18
B) 5.50
C) 1.22
D) 12.5

Question 64

Taste of the Town,Inc.operates a gourmet sandwich shop.The company orders bread,cold cuts,and produce several times a week.If the cost of these items remains constant per customer served,the cost is said to be:

A) Variable
B) Fixed
C) Opportunity
D) Mixed

Question 65

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:

A) a low R² statistic suggests that the independent value (units sold) more strongly influences the dependent variable (total cost).
B) the R² statistic represents the percentage of change in the independent variable (units sold) that is explained by a change in the independent variable (total cost).
C) the R² statistic represents the percentage of change in the dependent variable (total cost) that is explained by a change in the independent variable (units sold).
D) the R² statistic is not a good measure of reliability.

Question 66

Frazier Company sells women's ski jackets.The average sales price is $275 and the variable cost per jacket is $175.Fixed Costs are $1,350,000.If Frazier sells 15,000 jackets,the contribution margin will be:

A) $2,775,000
B) $1,500,000
C) $2,250,000
D) $150,000

Question 67

The results below represent what form of cost behavior? $\begin{array}{lrr}&\text { Year } 1 & \text { Year } 2\\\text { Units } & 4,500 & 4,800 \\\text { Total Cost } & \$ 11,250& \$ 12,000\end{array}$

A) Fixed Cost
B) Variable Cost
C) Mixed Cost
D) Opportunity Cost

Question 68

The variable cost per unit increases in direct proportion to the activity base.

Question 69

The following information is for Gable,Inc.and Harlowe,Inc.for the recent year. $$\begin{array} { l r r r } & \text { Gable, Inc. } & \text { Harlowe, Inc. } \\\text { Sales } & \$ 800,000 & \$ 800,000 \\\text { Variable costs } & \underline{ 400,000 }& \underline{200,000 }\\\text { Contribution margin } & 400,000 & 600,000 \\\text { Fixed costs } & \underline{200,000 } & \underline{ 400,000} \\\text { Income from operations }& \underline{ \$ 200,000 }& \underline{ \$ 200,000}\end{array}$$ Based on the above data,which company has a higher operating leverage?

A) Gable, Inc.
B) Harlowe, Inc.
C) Operating leverage is the same for both companies
D) Cannot be determined

Question 70

Carson Corporation's sales increase from $500,000 to $600,000 in the current year.What is the percentage change in sales?

A) 20%
B) 25%
C) 22%
D) 16.7%

Question 71

Which characteristic is true of the high-low method,the scattergraph method,and regression analysis?

A) All methods will produce the same estimate of variable and fixed costs.
B) All methods use historic data to estimate variable and fixed costs.
C) All methods use only two data points in analyzing a mixed cost.
D) None of these are correct.

Question 72

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

A) rent on warehouse facility.
B) depreciation on its manufacturing equipment.
C) hourly wages for machine operators.
D) property taxes on its factory building.

Question 73

Select the incorrect statement regarding fixed and variable costs.

A) Fixed cost per unit remains constant as the number of units increases.
B) Total variable cost is represented by a straight line sloping upward from the origin when total variable cost is graphed versus number of units.
C) The concept of relevant range applies to both fixed costs and variable costs.
D) The terms "fixed" and "variable" refer to the behavior of total cost.

Question 74

The following income statement was produced when volume of sales was at 400 units. $\begin{array}{lrr} \text { Sales Revenue } &\$2,000\\ \text { Variable Cost } &\underline{1,200}\\ \text { Contribution Margin} &\$800\\ \text { Fixed Cost} &\underline{300}\\ \text { Net Income } &\underline{\$500}\\\end{array}$
If volume reaches 500 units,net income will be:

A) $625
B) $1,800
C) $700
D) None of these

Question 75

Mark Company,Inc.sells electronics.The company generated sales of $45,000.Contribution margin is $20,000 and net income is $4,000.Based on this information,the magnitude of operating leverage is:

A) 2.25
B) 11.25
C) 5.00
D) 6.25

Question 76

The following income statements are provided for Li Company's last two years of operation: $\begin{array}{lrr}&\text { Year 1}&\text { Year 2}\\\text { Number of units produced and sold } & 3,500 & 3,000 \\\text { Sales revenue } & \$ 101,500& \$ 87,000 \\\text { Cost of goods sold } & 68,000& 60,000 \\\text { Gross margin } & 33,500& 27,000 \\\text { General, selling, and administrative expenses } & 13,000& 12,00 0 \\\text { Net income } & \$ 20,500 & \$ 15,000\end{array}$ Assuming that cost behavior did not change over the two-year period,what is the company's annual fixed general,selling,and administrative cost?

A) $6,500
B) $6,000
C) $3,000
D) $2,500

Question 77

The following income statements are provided for Li Company's last two years of operation: $\begin{array}{lrr}&\text { Year 1}&\text { Year 2}\\\text { Number of units produced and sold } & 3,500 & 3,000 \\\text { Sales revenue } & \$ 101,500& \$ 87,000 \\\text { Cost of goods sold } & 68,000& 60,000 \\\text { Gross margin } & 33,500& 27,000 \\\text { General, selling, and administrative expenses } & 13,000& 12,00 0 \\\text { Net income } & \$ 20,500 & \$ 15,000\end{array}$ 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

Question 78

The following income statements are provided for Li Company's last two years of operation: $\begin{array}{lrr}&\text { Year 1}&\text { Year 2}\\\text { Number of units produced and sold } & 3,500 & 3,000 \\\text { Sales revenue } & \$ 101,500& \$ 87,000 \\\text { Cost of goods sold } & 68,000& 60,000 \\\text { Gross margin } & 33,500& 27,000 \\\text { General, selling, and administrative expenses } & 13,000& 12,00 0 \\\text { Net income } & \$ 20,500 & \$ 15,000\end{array}$ Assuming that cost behavior did not change over the two-year period,what is Li Company's contribution margin in Year 2?

A) $33,000
B) $32,000
C) $39,000
D) $69,000

Question 79

The following information is for Companies M and N for the most recent year: $$\begin{array} { l l l } & \text { Company M } & \text { Company N } \\\text { Sales } & \$ 500,000 & \$ 500,000 \\\text { Variable costs } & \$ 300,000 & \$ 200,000 \\\text { Fixed costs } & \$ 50,000 & \$ 150,000\end{array}$$ Based on this information,which of the following statements is incorrect?

A) N's magnitude of operating leverage is lower than M's.
B) N would suffer more than M from an equal drop in sales revenue.
C) N's cost structure carries greater risk and greater potential for profit.
D) If N's sales increased by 20%, its net income would increase by 40%.

Question 80

If managers of a company do not understand the behavior of its costs,they are likely to make poor decisions about the company's operations.