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

Sandford Company manufactures one product. Its variable manufacturing cost is $16 per unit; total fixed manufacturing cost is $600,000.Required: 1.) Calculate Sandford's total manufacturing costs if it produces 10,000 units.2.) What would be the total cost per unit (including both fixed and variable costs) assuming that Sandford produces 10,000 units? 3.) Calculate Sandford's total manufacturing costs if it produces 20,000 units.4.) What would be the total cost per unit assuming that Sandford produces 20,000 units? 5.) Compare your answers from parts 2 and 4. If the cost per unit is different at 10,000 units than at 20,000 units, explain why.

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

Why would a company often calculate and use average costs of its products and services rather than actual costs?

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

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

The following income statement is provided for Ramirez Company for the current year: Sales revenue (2,500 units x \ 40 per unit) \ 100,000 Cost of goods sold (varable; 2,500 units x \ 16 per unit) (40,000) Cost of goods sold (fixed) (8,000) Gross margin 52,000 Administrative salaries (12,000) Depreciation (8,000) Supplies (2,500 units x \ 4 per unit) (10,000) Net income \ 22,000 What amount was the company's contribution margin?

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?

Select the incorrect statement regarding cost structures.

What is meant by the phrase, "cost structure?"

Compare least squares regression and the scattergraph method of analyzing mixed costs.

Based on the following operating data, the operating leverage is: Sales \ 500,000 Variable costs 280,000 Contribution margin 220,000 Fired costs 180,000 Income from operations \ 40,000

Select from the following the incorrect statement regarding contribution margin.

When selecting the high and low observations under the high-low method of analyzing mixed costs, the selection should be based on the dependent variable (cost).

Describe the format of an income statement prepared using the contribution margin approach.

Executive management at Ballard Books is very optimistic about the chain's ability to achieve significant increases in sales in each of the next five years. The company will most benefit if management creates a:

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

How does total variable cost respond when volume increases?

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

The magnitude of operating leverage for Perkins Corporation is 4.5 when sales are $100,000. If sales increase to $110,000, profits would be expected to increase by what percent?

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