Exam 2: Introduction to Cost Behavior and Cost Volume Relationships

Suppose the In & Out Motel has annual fixed costs applicable to its rooms of $1.2 million for its 300- room motel, average daily room rents of $50, and average variable costs of $10 for each room rented. It operates 365 days per year. The percent of occupancy for the year needed to breakeven is:

A firm's ratio of fixed and variable costs

Suppose a Best Western motel has annual fixed costs applicable to its rooms of $1.2 million for its 300- room motel, average daily room rents of $50, and average variable costs of $10 for each room rented. It operates 365 days per year. The amount of net income on rooms that will be generated if the motel is half full throughout the entire year is:

is the ratio of fixed costs to variable costs.

Only one cost driver may affect a cost at any given time.

will decrease a company's break- even point.

Gross margin = sales price - cost of goods sold.

With very short time spans, costs become more fixed and less variable.

Selling expenses are found in the cost of goods sold.

Total contribution margin / total sales = 100% - variable cost percentage.

An industry that has a high contribution- margin percentage is the airlines.

After a certain point, a unit sold does not generate marginal income.

Small increases in profits occur for high contribution- margin ratio companies when sales grow.

Target sales volume in units = (variable expenses + target net income) / unit contribution margin.

Given a break- even point of 88,000 units and a contribution margin per unit of $9.60, the total number of units that must be sold to reach a net pre- tax profit of $18,096 is:

Bonnie and Clyde started the BC Restaurant in 20X0. They rented a building, bought equipment, and hired two employees to work full time at a fixed monthly salary. Utilities and other operating charges remain fairly constant during each month. During the past two years, the business has grown with average sales increasing 1% a month. This situation pleases both Bonnie and Clyde, but they do not understand how sales can grow by one percent a month while profits are increasing at an even faster pace. They are afraid that one day they will wake up to increasing sales but decreasing profits. Required: Explain why the profits have increased at a faster rate than sales.

Gross margin focuses on sales in relation to variable cost.

Break- even volume in dollars = variable costs / contribution- margin ratio.

is all variable costs divided by sales.

Assume the following cost information for Marie Company: Selling price per unit \ 144 Variable costs per unit \ 80 Total fixed costs \ 80,000 Tax rate 40\% If fixed costs increased by 10% and management wanted to maintain the original break- even point, then the selling price per unit would have to be increased to: