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

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Question 21

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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

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Question 22

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How is operating leverage related to cost structure?

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Cost structure refers to the proportion ...

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Question 23

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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:

Contribution margin can only be determined if costs are separated into product and period costs.

Assume that Microsoft and Sony both plan to introduce a new hand-held video game.Microsoft plans to use a heavily automated production process to produce its product while Sony plans to use a labor-intensive production process.The following revenue and cost relationships are provided: $\begin{array}{lccc}&\text { Microsoft Game}&\text { Sony Game }\\\text {Selling price per unit}&150&150\\\text { Variable cost per unit }\\\text { Direct material } & \$ 27.00 & \$27.00 \\ \text { Direct labor } & 7.50&30.00 \\ \text { Overhead } & 7.50&30.00 \\ \text { Selling and administrative } & 3.00 & 3.00\\\text { Annual fixed costs } & \\\text { Overhead } & \$ 600,000& \$ 240,000 \\\text { Selling and administrative } & 135,000& 135,000\end{array}$ Required: (a)Compute the contribution margin per unit for each company. (b)Prepare a contribution income statement for each company assuming each company sells 8,000 units. (c)Compute each firm's net income if the number of units sold increases by 10%. (d)Which firm will have more stable profits when sales change? Why?

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:

As activity increases,the fixed cost per unit increases while the variable cost per unit remains constant.

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

An advantage of using the scattergraph method over the high-low method is that all points of data are used in determining the cost line.

The higher the magnitude of a company's operating leverage,the smaller the decrease in profit for a given percentage decrease in revenue.

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?

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.

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

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

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

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.

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

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

Select the incorrect statement regarding cost structures.

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?