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

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Question 21

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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

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Question 22

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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.

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Question 23

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Select the correct statement regarding fixed costs.

A cost that is part selling cost and part manufacturing cost is referred to as a mixed cost.

What are mixed or semivariable costs? Give an example of a mixed cost.

Why would a company need to estimate the fixed and variable components of a mixed cost?

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

A low magnitude of operating leverage is best for most companies.

What total amount of net income will Harlowe, Inc. earn if it experiences a 10 percent increase in revenue?

Descriptions of cost behavior as fixed or variable pertain to a particular range of activity.

If a company had a mixed cost structure, every dollar of revenue after covering the fixed costs would be pure profit.

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

Assuming that cost behavior did not change over the two-year period, what is the company's annual fixed general, selling, and administrative cost?

Cannon Company operates a clothing store that reported the following operating results for the current year: Required: Prepare an income statement for Cannon Company using the contribution margin format. $\begin{array}{|l|c|}\hline\text { Income Statement }\\\hline \text { Sales revenue } & \$ 2,000,000 \\\hline \text { Cost of goods sold } & (1,200,000) \\\hline \text { Gross margin } & \$ 800,000 \\\hline \text { Employee commissions and bonuses ( } \% \% \text { of sales) } & (100,000) \\\hline \text { Depreciation expense } & (150,000) \\\hline \text { Salaries expense } & (260,000) \\\hline \text { Shipping and delivery expense (2\% of sales) } & (40,000) \\\hline \text { Advertising expense } & (80,000) \\\hline \text { Net income } & \$ 170,000 \\\hline\end{array}$

Variable costs will become fixed outside the relevant range.

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

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

How is operating leverage related to cost structure?

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

Select the incorrect statement regarding the relevant range of volume.