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

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Question 31

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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.

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Question 32

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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

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Question 33

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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.

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

Fixed cost per unit:

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

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).

Select from the following the incorrect statement regarding contribution margin.

How does total variable cost respond when volume increases?

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

Select the correct statement from the following.

Select the correct statement regarding fixed costs.

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:

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

If a company had a pure fixed cost structure,what would be the relationship between a given dollar increase in sales and net income?

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?

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: $\begin{array} { | c | c | c | c | } \hline \text { Jan-March } & \text { April-June } & \text { July-Sep } & \text { Oct-Dec } \\\hline 110 & 140 & 150 & 100 \\\hline\end{array}$

In regression analysis,an r-square value of one indicates that there is a perfect fit between the independent and dependent variables.

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?

Operating leverage exists when: