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Exam 11: Cost Behavior, Operating Leverage, and Profitability Analysis

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Question 61

True/False

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

A) True
B) False

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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.

A) True
B) False

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Question 63

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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:

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,

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

Zeus, Inc. produces a product that has a variable cost of $9.50 per unit. The company's fixed costs are $40,000. The product sells for $12.00 a unit and the company desires to earn a $20,000 profit. What is the volume of sales in units required to achieve the target profit? (Do not round intermediate calculations.)

A margin of safety of 30% means that every dollar in revenue generates thirty cents in profit.

Operating leverage exists when:

For a mixed cost, total cost increases in direct proportion to volume.

Select the term from the list provided that best matches each of the following descriptions. A) A condition in which a percentage change in revenue will produce a proportionately larger percentage change in net income B) A cost that changes in total in direct proportion to changes in volume C) A factor that causes (or drives) changes in costs D) Costs composed of both fixed and variable components E) The difference between a company's sales revenue and its variable costs F) The way a cost changes relative to change in a measure of activity G) A cost that remains constant in total when volume changes H) A company's cost mix or relative proportion of variable and fixed costs to total costs -Cost behavior

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 company with a completely fixed cost structure will have operating leverage of 1.

Ecco Company has total fixed costs of $5,000, sells a product whose contribution margin is $50 and selling price per unit is $125, and has current sales of $15,000. The company's margin of safety ratio is 20%.

During the current year, Fairview Corporation sold 100,000 units of its product for $20 each. The variable cost per unit was $14, and Fairview's margin of safety was 40,000 units. What was the amount of Fairview's total fixed costs?

Billings Company has developed the following budgeted income statement: The Company is experimenting with new engineering techniques and believes it can reduce variable cost to $4.50 per unit and significantly improve the product. The innovations would double fixed costs but the company expects to be able to increase sales to 3,500 units. If this strategy is pursued the company's budgeted net income will:

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:

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

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?

Select the term from the list provided that best matches each of the following descriptions. A) A condition in which a percentage change in revenue will produce a proportionately larger percentage change in net income B) A cost that changes in total in direct proportion to changes in volume C) A factor that causes (or drives) changes in costs D) Costs composed of both fixed and variable components E) The difference between a company's sales revenue and its variable costs F) The way a cost changes relative to change in a measure of activity G) A cost that remains constant in total when volume changes H) A company's cost mix or relative proportion of variable and fixed costs to total costs -Mixed cost

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