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

If managers of a company do not understand the behavior of its costs, they are likely to make poor decisions about the company's operations.

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 -Contribution margin

Southern Food Service operates six restaurants in the Atlanta area. The company pays rent of $20,000 per year for each shop. The managers of each shop are paid a salary of $4,200 per month and all other employees are paid on an hourly basis. Relative to the number of hours worked, total compensation cost for a particular shop is which kind of cost?

The following income statement is provided for Grant, Inc. What is this company's magnitude of operating leverage?

Based on the following cost data, what conclusions can you make about the costs of Product A and Product B?

Rocky Mountain Bottling Company produces a soft drink that is sold for a dollar. At production and sales of 800,000 units, the company pays $600,000 in production costs, half of which are fixed costs. At that volume, general, selling, and administrative costs amount to $250,000 of which $70,000 are fixed costs. What is the amount of contribution margin per unit?

The margin of safety ratio can be defined as the:

Burke Company has a break-even of $600,000 in total sales. Assuming the company sells its product for $50 per unit, what is its margin of safety in units if sales total $850,000?

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 -Fixed cost

At its $60 selling price, Atlantic Company has sales of $15,000, variable manufacturing costs of $4,000, fixed manufacturing costs of $1,000, variable selling and administrative costs of $2,000 and fixed selling and administrative costs of $1,000. What is the company's contribution margin per unit?

Newton Company currently produces and sells 4,000 units of a product that has a contribution margin of $6 per unit. The company sells the product for a sales price of $20 per unit. Fixed costs are $18,000. The company is considering investing in new technology that would decrease the variable cost per unit to $8 per unit and double total fixed costs. The company expects the new technology to increase production and sales to 9,000 units of product. What sales price would have to be charged to earn a $99,000 desired profit assuming the investment in technology is made?

In order to prepare a contribution format income statement, costs must be separated into:

To attain a target profit, the total gross margin generated from sales must be sufficient to cover total fixed costs plus the target profit.

Based on the following operating data, the operating leverage is:

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

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 -Variable cost

Two different costs incurred by Ruiz Company exhibit the following behavior pattern per unit: Cost #1 and Cost #2 exhibit which of the following cost behavior patterns, respectively?

Once sales reach the break-even point, each additional unit sold will:

Pierce Company's break-even point is 12,000 units. Its product sells for $25 and has a $10 variable cost per unit. What is the company's total fixed cost amount?

Adams Company sells a product whose contribution margin is $10 and selling price is $25. If the company's break-even point is 100 units, its total fixed costs must be $500.