Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Which of the following equations can be used to compute a firm's magnitude of operating leverage?

Accepted Answer

A)  Net income ÷ Sales 
B)  Fixed costs ÷ Contribution margin 
C)  Contribution margin ÷ Net income 
D)  Net income ÷ Contribution margin 
A)  Net income ÷ Sales 
B)  Fixed costs ÷ Contribution margin 
C)  Contribution margin ÷ Net income 
D)  Net income ÷ Contribution margin

Question 3

Phan Company has not reported a profit in five years. This year the company would like to narrow its loss to $7,500. Assuming its selling price is $36.50 per unit and its variable costs per unit are $24, how many units must be sold to achieve its target given that total fixed costs are $60,000?

Accepted Answer

A)  2,188 
B)  1,439 
C)  4,200 
D)  1,600 
A)  2,188 
B)  1,439 
C)  4,200 
D)  1,600

Question 4

Select from the following the incorrect statement regarding contribution margin.

Accepted Answer

A)  Sales - Fixed costs = Contribution margin 
B)  Net income + Total fixed costs = Contribution margin 
C)  At the breakeven point (where the company has neither profit nor loss), Total fixed costs = Total contribution margin 
D)  Total sales revenue times the contribution margin percentage = Total contribution margin 
A)  Sales - Fixed costs = Contribution margin 
B)  Net income + Total fixed costs = Contribution margin 
C)  At the breakeven point (where the company has neither profit nor loss), Total fixed costs = Total contribution margin 
D)  Total sales revenue times the contribution margin percentage = Total contribution margin

Question 5

At the break-even point:

Accepted Answer

A)  Sales would be equal to total costs. 
B)  Contribution margin would be equal to total fixed costs. 
C)  Sales would be equal to fixed costs. 
D)  Both sales would be equal to total costs and contribution margin would be equal to total fixed costs are correct. 
A)  Sales would be equal to total costs. 
B)  Contribution margin would be equal to total fixed costs. 
C)  Sales would be equal to fixed costs. 
D)  Both sales would be equal to total costs and contribution margin would be equal to total fixed costs are correct.

Question 6

If a company is operating beyond its break-even point, sale of one more unit of product increases the company's profit by the amount of the unit contribution margin.

Accepted Answer

A) True 
 B)False

Question 7

If revenues are expected to decline, management should attempt to convert its variable costs into fixed costs.

Accepted Answer

A) True 
 B)False

Question 8

The following information is for Gable, Inc. and Harlowe, Inc. for the recent year.   Based on the above data, which company has a higher operating leverage?

Accepted Answer

A)  Gable, Inc. 
B)  Harlowe, Inc. 
C)  Operating leverage is the same for both companies 
D)  Cannot be determined 
A)  Gable, Inc. 
B)  Harlowe, Inc. 
C)  Operating leverage is the same for both companies 
D)  Cannot be determined

Question 9

No contribution margin is provided by selling one unit of a product at a price of $35 if variable production costs are $20, variable general and administrative costs are $5, and fixed costs are $10 per unit.

Accepted Answer

A) True 
 B)False

Question 10

Fixed cost per unit:

Accepted Answer

A)  decreases as production volume decreases. 
B)  is not affected by changes in the production volume. 
C)  decreases as production volume increases. 
D)  increases as production volume increases. 
A)  decreases as production volume decreases. 
B)  is not affected by changes in the production volume. 
C)  decreases as production volume increases. 
D)  increases as production volume increases.

Question 11

During the current year, Winchester Company sold 80,000 units at a selling price of $20 per unit. Variable cost per unit was $15, and Winchester's net income for the year was $40,000. What was the amount of Winchester's fixed costs?

Accepted Answer

A)  $360,000 
B)  $440,000 
C)  $1,160,000 
D)  $400,000 
A)  $360,000 
B)  $440,000 
C)  $1,160,000 
D)  $400,000

Question 12

Rock Creek Bottling Company pays its production manager a salary of $6,000 per month. Salespersons are paid strictly on commission, at $1.50 for each case of product sold. For Rock Creek Bottling Company, the cost of the salespersons' commissions is an example of:

Accepted Answer

A)  a fixed cost. 
B)  a variable cost. 
C)  a mixed cost. 
D)  none of these 
A)  a fixed cost. 
B)  a variable cost. 
C)  a mixed cost. 
D)  none of these

Question 13

Carson Corporation's sales increase from $500,000 to $600,000 in the current year. What is the percentage change in sales?

Accepted Answer

A)  20% 
B)  25% 
C)  22% 
D)  16.7% 
A)  20% 
B)  25% 
C)  22% 
D)  16.7%

Question 14

Costs that might be incurred by service, merchandising, and manufacturing companies are described below:
   Required:
Classify each cost as variable (V) or fixed (F) with respect to volume or level of activity.

Accepted Answer

@#IMG-DLM&_TB3570_00

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Based on the income statements shown below, which division has the cost structure with the highest operating leverage?

Accepted Answer

A)  Bottled Water. 
B)  Fruit Juices. 
C)  Soft Drinks. 
D)  The three divisions have identical operating leverage. 
A)  Bottled Water. 
B)  Fruit Juices. 
C)  Soft Drinks. 
D)  The three divisions have identical operating leverage.

Question 17

Select the correct statement regarding fixed costs.

Accepted Answer

A)  Because they do not change, fixed costs should be ignored in decision making. 
B)  The fixed cost per unit decreases when volume increases. 
C)  The fixed cost per unit increases when volume increases. 
D)  The fixed cost per unit does not change when volume decreases. 
A)  Because they do not change, fixed costs should be ignored in decision making. 
B)  The fixed cost per unit decreases when volume increases. 
C)  The fixed cost per unit increases when volume increases. 
D)  The fixed cost per unit does not change when volume decreases.

Question 18

A cost that contains both fixed and variable elements is referred to as a:

Accepted Answer

A)  mixed cost. 
B)  hybrid cost. 
C)  relevant cost. 
D)  nonvariable cost. 
A)  mixed cost. 
B)  hybrid cost. 
C)  relevant cost. 
D)  nonvariable cost.

Question 19

Based on the income statements of the three following retail businesses, which company has the highest operating leverage?

Accepted Answer

A)  Alpha Company 
B)  Beta Company 
C)  Gamma Company 
D)  They all have same operating leverage 
A)  Alpha Company 
B)  Beta Company 
C)  Gamma Company 
D)  They all have same operating leverage

Question 20

Falls Company has a contribution margin of $32 per unit and fixed costs of $500,000, and it desires to earn a profit of $100,000. What is the sales volume in units required to achieve this desired profit?

Accepted Answer

A)  3,125 units 
B)  18,750 units 
C)  15,625 units 
D)  12,500 units 
A)  3,125 units 
B)  18,750 units 
C)  15,625 units 
D)  12,500 units

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

Which of the following equations can be used to compute a firm's magnitude of operating leverage?

Phan Company has not reported a profit in five years. This year the company would like to narrow its loss to $7,500. Assuming its selling price is $36.50 per unit and its variable costs per unit are $24, how many units must be sold to achieve its target given that total fixed costs are $60,000?

Select from the following the incorrect statement regarding contribution margin.

At the break-even point:

If a company is operating beyond its break-even point, sale of one more unit of product increases the company's profit by the amount of the unit contribution margin.

If revenues are expected to decline, management should attempt to convert its variable costs into fixed costs.

The following information is for Gable, Inc. and Harlowe, Inc. for the recent year. Based on the above data, which company has a higher operating leverage?

No contribution margin is provided by selling one unit of a product at a price of $35 if variable production costs are $20, variable general and administrative costs are $5, and fixed costs are $10 per unit.

Fixed cost per unit:

During the current year, Winchester Company sold 80,000 units at a selling price of $20 per unit. Variable cost per unit was $15, and Winchester's net income for the year was $40,000. What was the amount of Winchester's fixed costs?

Rock Creek Bottling Company pays its production manager a salary of $6,000 per month. Salespersons are paid strictly on commission, at $1.50 for each case of product sold. For Rock Creek Bottling Company, the cost of the salespersons' commissions is an example of:

Carson Corporation's sales increase from $500,000 to $600,000 in the current year. What is the percentage change in sales?

Costs that might be incurred by service, merchandising, and manufacturing companies are described below: Required: Classify each cost as variable (V) or fixed (F) with respect to volume or level of activity.

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

Based on the income statements shown below, which division has the cost structure with the highest operating leverage?

Select the correct statement regarding fixed costs.

A cost that contains both fixed and variable elements is referred to as a:

Based on the income statements of the three following retail businesses, which company has the highest operating leverage?

Falls Company has a contribution margin of $32 per unit and fixed costs of $500,000, and it desires to earn a profit of $100,000. What is the sales volume in units required to achieve this desired profit?

An Introduction to Accounting

Accounting for Accruals and Deferrals

Accounting for Merchandising Businesses

Internal Controls, Accounting for Cash, and Ethics

Accounting for Receivables and Inventory Cost Flow

Accounting for Long-Term Operational Assets

Accounting for Liabilities

Proprietorships, Partnerships, and Corporations

Financial Statement Analysis

An Introduction to Management Accounting

Cost Accumulation, Tracing, and Allocation

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Planning for Capital Investments

Filters

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

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

Which of the following equations can be used to compute a firm's magnitude of operating leverage?

Phan Company has not reported a profit in five years. This year the company would like to narrow its loss to $7,500. Assuming its selling price is $36.50 per unit and its variable costs per unit are $24, how many units must be sold to achieve its target given that total fixed costs are $60,000?

Select from the following the incorrect statement regarding contribution margin.

At the break-even point:

If a company is operating beyond its break-even point, sale of one more unit of product increases the company's profit by the amount of the unit contribution margin.

If revenues are expected to decline, management should attempt to convert its variable costs into fixed costs.

The following information is for Gable, Inc. and Harlowe, Inc. for the recent year. Based on the above data, which company has a higher operating leverage?

No contribution margin is provided by selling one unit of a product at a price of $35 if variable production costs are $20, variable general and administrative costs are $5, and fixed costs are $10 per unit.

Fixed cost per unit:

During the current year, Winchester Company sold 80,000 units at a selling price of $20 per unit. Variable cost per unit was $15, and Winchester's net income for the year was $40,000. What was the amount of Winchester's fixed costs?

Rock Creek Bottling Company pays its production manager a salary of $6,000 per month. Salespersons are paid strictly on commission, at $1.50 for each case of product sold. For Rock Creek Bottling Company, the cost of the salespersons' commissions is an example of:

Carson Corporation's sales increase from $500,000 to $600,000 in the current year. What is the percentage change in sales?

Costs that might be incurred by service, merchandising, and manufacturing companies are described below: Required: Classify each cost as variable (V) or fixed (F) with respect to volume or level of activity.

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

Based on the income statements shown below, which division has the cost structure with the highest operating leverage?

Select the correct statement regarding fixed costs.

A cost that contains both fixed and variable elements is referred to as a:

Based on the income statements of the three following retail businesses, which company has the highest operating leverage?

Falls Company has a contribution margin of $32 per unit and fixed costs of $500,000, and it desires to earn a profit of $100,000. What is the sales volume in units required to achieve this desired profit?

An Introduction to Accounting

Accounting for Accruals and Deferrals

Accounting for Merchandising Businesses

Internal Controls, Accounting for Cash, and Ethics

Accounting for Receivables and Inventory Cost Flow

Accounting for Long-Term Operational Assets

Accounting for Liabilities

Proprietorships, Partnerships, and Corporations

Financial Statement Analysis

An Introduction to Management Accounting

Cost Accumulation, Tracing, and Allocation

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Planning for Capital Investments

Filters