Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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,

Accepted Answer

A)  Company A's cost structure has more variable costs than B's. 
B)  Company A's cost structure has higher fixed costs than B's. 
C)  Company B's cost structure has higher fixed costs than A's. 
D)  At a volume of 50,000 units, Company A's magnitude of operating leverage was lower than B's. 
A)  Company A's cost structure has more variable costs than B's. 
B)  Company A's cost structure has higher fixed costs than B's. 
C)  Company B's cost structure has higher fixed costs than A's. 
D)  At a volume of 50,000 units, Company A's magnitude of operating leverage was lower than B's.

Question 3

Operating leverage exists when:

Accepted Answer

A)  a company utilizes debt to finance its assets. 
B)  management buys enough of the company's shares of stock to take control of the corporation. 
C)  the organization makes purchases on credit instead of paying cash. 
D)  small percentage changes in revenue produce large percentage changes in profit. 
A)  a company utilizes debt to finance its assets. 
B)  management buys enough of the company's shares of stock to take control of the corporation. 
C)  the organization makes purchases on credit instead of paying cash. 
D)  small percentage changes in revenue produce large percentage changes in profit.

Question 4

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

Accepted Answer

The answer of Select the term from the list provided...

Question 5

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

Accepted Answer

A)  Rent on warehouse facility 
B)  Depreciation on its manufacturing equipment 
C)  Hourly wages for machine operators 
D)  Property taxes on its factory building 
A)  Rent on warehouse facility 
B)  Depreciation on its manufacturing equipment 
C)  Hourly wages for machine operators 
D)  Property taxes on its factory building

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Operating leverage enables a company to convert small changes in fixed costs into dramatic changes in profitability.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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?

Accepted Answer

A)  Fixed cost 
B)  Variable cost 
C)  Mixed cost 
D)  Relevant cost 
A)  Fixed cost 
B)  Variable cost 
C)  Mixed cost 
D)  Relevant cost

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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:

Accepted Answer

A)  differential range. 
B)  median range. 
C)  relevant range. 
D)  leverage range. 
A)  differential range. 
B)  median range. 
C)  relevant range. 
D)  leverage range.

Question 13

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

Accepted Answer

The answer of Select the term from the list provided...

Question 14

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:

Accepted Answer

A)  decrease by $4,250. 
B)  increase by $4,850. 
C)  increase by $13,250. 
D)  decrease by $4,150. 
A)  decrease by $4,250. 
B)  increase by $4,850. 
C)  increase by $13,250. 
D)  decrease by $4,150.

Question 15

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?

Accepted Answer

A)  $240,000 
B)  $560,000 
C)  $840,000 
D)  $360,000 
A)  $240,000 
B)  $560,000 
C)  $840,000 
D)  $360,000

Question 16

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.)

Accepted Answer

A)  24,000 units 
B)  16,000 units 
C)  17,000 units 
D)  4,000 units 
A)  24,000 units 
B)  16,000 units 
C)  17,000 units 
D)  4,000 units

Question 17

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:

Accepted Answer

A)  Variable 
B)  Fixed 
C)  Opportunity 
D)  Mixed 
A)  Variable 
B)  Fixed 
C)  Opportunity 
D)  Mixed

Question 18

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%.

Accepted Answer

A) True 
 B)False

Question 19

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?

Accepted Answer

A)  0.17 
B)  6.00 
C)  2.25 
D)  none of these 
A)  0.17 
B)  6.00 
C)  2.25 
D)  none of these

Question 20

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

Accepted Answer

A)  A pure variable cost structure offers higher potential rewards. 
B)  A pure fixed cost structure offers more security if volume expectations are not achieved. 
C)  In a pure variable cost structure, when revenue increases by $1, so do profits. 
D)  In a pure fixed cost structure, the unit selling price and unit contribution margin are equal. 
A)  A pure variable cost structure offers higher potential rewards. 
B)  A pure fixed cost structure offers more security if volume expectations are not achieved. 
C)  In a pure variable cost structure, when revenue increases by $1, so do profits. 
D)  In a pure fixed cost structure, the unit selling price and unit contribution margin are equal.

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

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,

Operating leverage exists when:

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

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

Operating leverage enables a company to convert small changes in fixed costs into dramatic changes in profitability.

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

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

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

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?

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:

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%.

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 incorrect statement regarding the relationship between cost behavior and profits.

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

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,

Operating leverage exists when:

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

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

Operating leverage enables a company to convert small changes in fixed costs into dramatic changes in profitability.

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

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

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

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?

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:

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%.

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 incorrect statement regarding the relationship between cost behavior and profits.

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