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

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Question 61

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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

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Question 62

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

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Question 63

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Maryland Novelties Company produces and sells souvenir products.Monthly income statements for two activity levels are provided below: $\begin{array}{c}\begin{array}{|l|}\hline \text {Unit volumes}\\\hline \text {Revenue}\\\hline \text {Less cost of goods sold}\\\hline \text {Gross margin}\\\hline \text {Less operating expenses}\\\hline \text {Salaries and commissions}\\\hline \text {Advertising expenses}\\\hline \text {Administrative expenses}\\\hline \text {Total operating expenses}\\\hline \text {Net income}\\\hline \end{array}\begin{array}{l}\hline20,000 \text { units }\\\hline\$ 150,000 \\\hline 60,000 \\\hline \$ 90,000 \\\hline\\\hline 20,000 \\\hline 30,000 \\\hline 12,500 \\\hline \$ 2,500 \\\hline \$ \quad 27,500 \\\hline \end{array}\begin{array}{|l|}\hline30,000 \text { units }\\\hline \$225,000\\\hline90,000\\\hline135,000\\\hline\\\hline 25,000 \\\hline 30,000 \\\hline 12,500 \\\hline 67,500 \\\hline \$ 67,500 \\\hline \end{array}\end{array}$ Required: 1)Identify the mixed expense(s). 2)Use the high-low method to separate the mixed costs into variable and fixed components. 3)Prepare a contribution margin income statement at the 20,000-unit level.

The activity base selected determines whether a cost behaves as a variable cost or fixed cost.

Which characteristic is

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

Assume that wages expense is a variable cost and that the relevant range is 10,000 to 15,000 labor hours.Within that range,the cost is $15 per hour.What can you assume about wages expense outside this range?

Multiple regression analysis should be performed when a single independent variable influences multiple dependent variables.

One reason for computing the average cost for a product rather than the actual cost is that average cost is easier to compute.

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

Former NFL coach Joe Gibbs is highly sought after as a guest speaker.His fee can run as high as $150,000 for a single two-hour appearance.Recently,he was asked to speak at a seminar offered by the National Sports in Education Foundation (NSEF).Due to the charitable nature of the organization,Mr.Gibbs offered to speak for $100,000.NSEF planned to invite 350 guests who would each make a $500 contribution to the organization.The Foundation's executive director was concerned about committing so much of the organization's cash to this one event.So instead of the $100,000 fee she countered with an offer to pay Mr.Gibbs 50% of the revenue received from the seminar and no other payments. Required: (a)Classify the two offers in terms of cost behavior (fixed vs.variable). Scenario A,NSEF pays Gibbs a $100,000 fee: Scenario B,NSEF pays Gibbs 50% of revenue: (b)Compute the budgeted income (assuming there are no other expenses)under each of the following scenarios: 1)NSEF agrees to pay the $100,000 fee,and 350 guests actually attend the seminar;and 2)NSEF pays Mr.Gibbs 50% of revenue,and 350 guests attend the seminar. (c)For each scenario ($100,000 fee vs.50% of revenue),compute the percentage increase in profit that would result if the Foundation is able to increase attendance by 20 percent over the original plan (to a total of 420).(Round the percentages to the nearest whole numbers. ) (d)For each scenario,compute NSEF's cost per contributor if 350 attend and if 420 contributors attend.(Round the cost per contributor to two decimal points. ) (e)Summarize the impact on risk and profits of shifting the cost s

Based on the income statements shown below,which division has the cost s

Contribution margin represents the amount available to cover fixed expenses and then provide company profits.

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

One way that computing an average cost per unit facilitates management decision making is that managers are provided more timely and more relevant cost information.

No contribution margin is provided by selling one unit of a product at a price of $35 if variable production costs are $20,variable general and administrative costs are $5,and fixed costs are $10 per unit.

ETutor is an online tutoring service provider that is particularly popular with college students.The company is interested in estimating the fixed and variable components of its tutoring services costs.The manager believes that these costs are driven by the number of hours of tutoring services provided.The following information was gathered for the last six months of business: $\begin{array} { | l | r | r | } \hline \text { Month } & \text { Number of Hours } & \text { Tutoring costs } \\\hline \text { January } & 25,000 & \$ 308,000 \\\hline \text { February } & 41,000 & 420,000 \\\hline \text { March } & 29,000 & 352,000 \\\hline \text { April } & 31,000 & 373,000 \\\hline \text { May } & 34,000 & 378,000 \\\hline \text { June } & 18,000 & 252,000 \\\hline\end{array}$ Required: 1)Compute the average tutoring cost per hour for the six-month period.(Round the average tutoring cost per hour to two decimal points. ) 2)Use the high-low method to estimate the total fixed cost and the variable cost per hour.(Round the variable cost per hour to two decimal points. ) 3)Name one advantage and one disadvantage of the high-low method. 4)Describe the scattergraph method that can be used to analyze mixed costs.

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

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

Select from the following the incorrect statement regarding contribution margin.