Exam 2: Cost Behavior and Cost Estimation

Gabbard and Fink CPA firm leases tax software from BGG Tax Software Company to prepare federal and state income tax returns.The lease agreement calls for a base charge of $5,000 per year plus $100 per year for each state for which returns are prepared.In addition, Gabbard and Fink are charged $2 ($1 for federal and $1 for state) for each tax return prepared.All of their clients have federal and state returns prepared, with 60 percent in Arkansas and 40 percent in Oklahoma. Required: a.What is the firm's total annual cost for the software if a total 2,500 returns are prepared? b.What is the firm's cost per unit at a level of 2,500 returns? c.What is the firm's cost per return if 2,000 are prepared? d.Besides software lease cost, list five other costs that Gabbard and Fink must consider when the company set the selling price to be charged to the clients.

If the activity level decreases, what happens to the unit fixed cost?

Suppose your cell phone company offers a plan under which you can buy time in blocks of 100 minutes.Every 100-minute block costs $15.If you use 101 minutes you will pay $30.This is an example of a

You and two friends decide to rent an apartment off campus.You have found an apartment for $750 per month.You and your two friends will share the rent equally.This is an example of a

All costs are either fixed or variable.That is, a cost cannot have a fixed and a variable component.

Suppose Kathy Lentz Company sells hand tatted lace for $25 per yard.Her materials cost $4 per yard and labor costs her $10 per yard.She also estimates her fixed cost to be $50 per month.If she sells 2,000 yards of lace during the month, what is her contribution margin ratio?

King Comics is a wholesaler of popular comic books.The company's records indicate the following financial results: Using the high-low method, what is the company's estimated variable and fixed components of operating expenses?

The formula for a contribution format income statement is

Vest Construction Company's cost of renting a crane for the last four months is as follows: Using the high-low method, what is the company's estimated variable and fixed components of operating expenses?

Assume a selling price of $20 per unit, variable cost per unit of $12, and total fixed cost of $500.If 200 units are sold, calculate the contribution margin ratio.

A 10 percent decrease in sales volume will result in a

In contrast to a variable cost,

You are living on campus and are considering moving off campus.You have found a two-bedroom apartment for $1,200 per month, but you cannot afford that much rent.You are considering inviting up to three of your friends to become your roommates.The relationship between the number of roommates, the total cost, and the cost per person is: This is an example of a

International Imports is a merchandising firm.Last year, the company reported sales of $674,500 and cost of goods sold of $404,700.The company's total variable selling and administrative expense was $60,705, and fixed selling and administrative expense was $53,960.The total fixed costs for the firm are

Operating income = Sales revenue - Variable cost per unit - Total fixed costs.

There is an important relation between contribution margin and profit.Which of the following statements is not true?

With a variable cost, as the level of activity decreases, the total cost remains the same.

Determine the fixed cost given the following information: Highest level of activity - 880 units at a total cost of $4,800 Lowest level of activity - 240 units at a total cost of $1,600

A contribution format income statement classifies costs by

Fixed costs are those costs that do not change as the level of activity increases or decreases.However, fixed costs may be classified as discretionary or committed. Required: a.Explain the differences in these classifications and give an example of each. b.Discuss why managers should consider the impact of these costs in the decision-making process in times of falling profits.