Exam 2: Cost Behavior, operating Leverage, and Profitability Analysis

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,

The following income statements are provided for Li Company's last two years of operation: Year 1 Year 2 Number of units produced and sold 3,500 3,000 Sales revenue \ 101,500 \ 87,000 Cost of goods sold 68,000 60,000 Gross margin 33,500 27,000 General, selling, and administrative expenses 13,000 12,000 Net income \ 20,500 \ 15,000 Assuming that cost behavior did not change over the two-year period,what is Li Company's contribution margin in Year 2?

What is a primary disadvantage of the high-low method of analyzing a mixed cost?

Multiple regression analysis should be performed when a single independent variable influences multiple dependent variables.

Contribution margin represents the amount available to cover fixed expenses and then provide company profits.

Two different costs incurred by Ruiz Company exhibit the following behavior pattern per unit: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Unit Sold }$ 50 100 150 200 Cost \#1 \ 300 Per unit \ 150 Per unit \ 100 Per unit \ 75 Per unit Cost\#2 \ 2 Per unit \ 2 perunit \ 2 perunit \ 2 perunit Cost #1 and Cost #2 exhibit which of the following cost behavior patterns,respectively?

Mug Shots operates a chain of coffee shops.The company pays rent of $15,000 per year for each shop.Supplies (napkins,bags,and condiments)are purchased as needed.The managers of each shop are paid a salary of $2,500 per month and all other employees are paid on an hourly basis.The cost of rent relative to the number of customers in a particular shop and relative to the number of customers in the entire chain of shops is which kind of cost,respectively?

The following information is for Companies M and N for the most recent year: Company M Company N Sales \ 500,000 \ 500,000 Variable costs \ 300,000 \ 200,000 Fixed costs \ 50,000 \ 150,000 Based on this information,which of the following statements is incorrect?

If a company had a pure variable cost structure,what would be the relationship between contribution margin and net income,and what would be the magnitude of operating leverage?

Assume that management uses the regression method to separate a mixed cost into its fixed and variable components.Briefly describe the significance of the R Square (R²)when interpreting the reliability of cost estimates that result.

Phoenix Corporation manufactures smartphones,generally selling from 200,000 to 300,000 units per year.The following cost data apply to the activity levels shown: Number of Units 200,000 250,000 300,000 Total costs Fixed \1 5,000,000 Variable Total costs Cost per Unit Fixed \7 5 Variable Total Cost per unit Required: 1.Complete the preceding table by filling the missing amounts for 250,000 and 300,000 units. 2.Assume that Phoenix actually makes 280,000 units.What would be the total costs and the cost per unit at this level of activity? (Round the cost per unit to two decimal points.) 3.If Phoenix sells each unit for $220,what is Phoenix's magnitude of operating leverage at sales of 280,000 units? (Round to two decimal points.)

The activity director for City Recreation is planning an activity.She is considering alternative ways to set up the activity's cost structure.Select the incorrect statement from the following.

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.

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 production manager's salary is an example of:

Cool Runnings operates a chain of frozen yogurt shops.The company pays $5,000 of rent expense per month for each shop.The managers of each shop are paid a salary of $3,000 per month and all other employees are paid on an hourly basis.Relative to the number of shops,the cost of rent is which kind of cost?

Blackstock Company manufactures digital cameras.Indicate whether its cost behavior is fixed,variable,or mixed by placing X's in the appropriate boxes.As an example,commissions paid to sales staff would be classified as variable. Cost Cost Behavior Insurance on executive offices Fixed Variable Mixed Lens caps for digital cameras Depreciation on manufacturing equipment Shipping cost to deliver products to customers Salary of company president Wages of assembly workers Product advertising Utilities: electricity to run machines and for heat and lights in factory

Wu Company incurred $40,000 of fixed cost and $50,000 of variable cost when 4,000 units of product were made and sold. If the company's volume doubles,the company's total cost will:

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

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