Question 1

Select the incorrect statement regarding the use of average unit costs.

Accepted Answer

A) Average costs should be calculated for a sufficiently long time period to capture seasonal fluctuations in costs. 
B) Average costs are often more relevant for decision making than are actual costs. 
C) Average cost information can help managers evaluate performance of the company or departments in the company. 
D) Cost averaging should be used only for fixed costs, and not for variable costs. 
A) Average costs should be calculated for a sufficiently long time period to capture seasonal fluctuations in costs. 
B) Average costs are often more relevant for decision making than are actual costs. 
C) Average cost information can help managers evaluate performance of the company or departments in the company. 
D) Cost averaging should be used only for fixed costs, and not for variable costs.

Question 2

Grant Company and Lee Company compete in the same market. The following budgeted income statements illustrate their cost structures. $\begin{array}{|l|c|c|}
\hline &\text { Grant Company } &\text { Lee Company }\
\hline \text { Number of customers } &  200 &  200 \
\hline \text { Sales revenue }(200 \times \$ 150) & \$  30,000 & \$  30,000 \
\hline \text { Less variable costs } &  6,000 &  18,000 \
\hline \text { Contribution margin } & \$  24,000 & \$  12,000 \
\hline \text { Less fixed costs } &  19,000 & 7,000 \
\hline \text { Net income } & \$  5,000 & \$  5,000 \
\hline
\end{array}$
 Required:
(a) If Grant Company lowers its price to $135, it will lure 80 customers away from Lee Company. Prepare Grant's income statement based on 280 customers.(b) If Lee Company lowers its price to $135 (assuming that Grant Company is still charging $150 per customer), Lee would lure 80 customers away from Grant. Prepare Lee's income statement based on 280 customers.(c) Which of the companies would benefit more from lowering its sales price to attract more customers, and why?

Accepted Answer

(a) Grant Company income statement
(b) L

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

Select the correct statement from the following.

Accepted Answer

A) A fixed cost structure offers less risk (i.e., less earnings volatility) and higher opportunity for profitability than does a variable cost structure. 
B) A variable cost structure offers less risk and higher opportunity for profitability than does a fixed cost structure. 
C) A fixed cost structure offers greater risk but higher opportunity for profitability than does a variable cost structure. 
D) A variable cost structure offers greater risk but higher opportunity for profitability than does a fixed cost structure. 
A) A fixed cost structure offers less risk (i.e., less earnings volatility) and higher opportunity for profitability than does a variable cost structure. 
B) A variable cost structure offers less risk and higher opportunity for profitability than does a fixed cost structure. 
C) A fixed cost structure offers greater risk but higher opportunity for profitability than does a variable cost structure. 
D) A variable cost structure offers greater risk but higher opportunity for profitability than does a fixed cost structure.

Question 5

The following income statements are provided for two companies operating in the same industry: $\begin{array}{|l|c|c|}
\hline&\text { Felix Company}& \text {Jinx Company }\
\hline\text { Reverule } & \$  200,000 & \$  200,000 \
\hline \text { Variable costs } &  (25,000) &  (70,000) \
\hline \text { Contribution margin } & 175,000 & 130,000 \
\hline \text { Fixed costs } & (70,000) & (25,000) \
\hline \text { Net income } & \$  105,000 & \$  105,000\
\hline
\end{array}$

Assuming sales increase by $1,000, select the correct statement from the following:

Accepted Answer

A) Felix's net income will be more than Jinx's. 
B) Only Felix will experience an increase in profit. 
C) Felix's net income will increase by $250. 
D) Jinx's net income will increase by 6%. 
A) Felix's net income will be more than Jinx's. 
B) Only Felix will experience an increase in profit. 
C) Felix's net income will increase by $250. 
D) Jinx's net income will increase by 6%.

Question 6

Based on the following cost data, items labeled (a) and (b) in the table below are which of the following amounts, respectively? $$\begin{array} { | l | r | r | } 
\hline \text { Number of units: } & 1,500 & 3,000 \
\hline \text { Total cost: } & & \
\hline \text { Variable } & \$ 7,500 & \$ 15,000 \
\hline \text { Fixed } & \$ 6,000 & \$ 6,000 \
\hline & & \
\hline \text { Cost per unit: } & & \
\hline \text { Variable } & \$ 5 & \text { (a) } \
\hline \text { Fixed } & \$ 4 & \text { (b) } \
\hline
\end{array}$$

Accepted Answer

A) (a) = $3.00; (b) = $3.00 
B) (a) = $5.00; (b) = $4.00 
C) (a) = $2.50; (b) = $2.00 
D) (a) = $5.00; (b) = $2.00 
A) (a) = $3.00; (b) = $3.00 
B) (a) = $5.00; (b) = $4.00 
C) (a) = $2.50; (b) = $2.00 
D) (a) = $5.00; (b) = $2.00

Question 7

How does fixed cost per unit behave when volume decreases?

Accepted Answer

Answers will vary
Fixed cost p

Question 8

The following information is given regarding driving lessons provided by Arrive Alive Company over several spans of time: Select the incorrect statement from the following. $$\begin{array} { | l | r | r | r | } 
\hline &  { \text { Length of Time } } \
\hline & \text { TODAY } & \text { ONE YEAR } & \text { FIVE YEARS } \
\hline \text { Total cost of lessons } & \$ 600 & \$ 110,000 & \$ 508,000 \
\hline \text { Number of lessons } & 50 & 10,000 & 55,000 \
\hline
\end{array}$$

Accepted Answer

A) The average cost per lesson over the five-year period was $9.24. 
B) Based on the most current information, the cost per lesson was $12.00. 
C) The average cost based on the total five-year period is probably the most appropriate cost for pricing purposes. 
D) The selection of the most appropriate time span for calculating the average cost often requires considerable judgment. 
A) The average cost per lesson over the five-year period was $9.24. 
B) Based on the most current information, the cost per lesson was $12.00. 
C) The average cost based on the total five-year period is probably the most appropriate cost for pricing purposes. 
D) The selection of the most appropriate time span for calculating the average cost often requires considerable judgment.

Question 9

The contribution margin format income statement is not widely used for external financial reporting, but is allowed by GAAP.

Accepted Answer

A) True 
 B)False

Question 10

In the graph below, which depicts the relationship between units produced and total cost, the dotted line depicts which type of total cost?

Accepted Answer

A) Variable cost 
B) Fixed cost 
C) Mixed cost 
D) None of these 
A) Variable cost 
B) Fixed cost 
C) Mixed cost 
D) None of these

Question 11

What is an activity base, and how does the activity base relate to a variable cost?

Accepted Answer

Answers will vary
An activity base is a

Question 12

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 13

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 14

Contribution margin income statements for two competing companies are provided below:
 $\begin{array}{|l|l|l|}
\hline &{\text { Yin Company }} & \text { Yang Company } \
\hline \text { Revenue } & \$  750,000 & \$  750,000 \
\hline \text { Less variable costts }&300,000&525,000 \
\hline \text { Contribution margin } &\$450,000&\$225,000\
\hline \text { Less fixed costs } &405,000&180,000\
\hline \text { Net income }&\$45,000&\$45,000\
\hline
\end{array}$ Required:
1) Show each company's cost structure by inserting the percentage of the company's revenue represented by each item on the contribution income statement.2) Compute each company's magnitude of operating leverage.3) Using the operating leverage measures computed in requirement 2, determine the increase in each company's net income (percentage and amount) if each company experiences a 10 percent increase in sales.4) Assume that sales are expected to continue to increase for the foreseeable future, which company probably has more desirable cost structure? Why?

Accepted Answer

Answers will vary
1)2) Magnitude of oper

Question 15

If a company shifts its cost structure by decreasing fixed costs and increasing variable costs, it will lower both the level of risk and its potential for profits.

Accepted Answer

A) True 
 B)False

Question 16

Assuming that cost behavior did not change over the two-year period, what is the amount of the company's variable cost of goods sold per unit?

Accepted Answer

A) $12.00 per unit 
B) $16.00 per unit 
C) 22.00 per unit 
D) none of these 
A) $12.00 per unit 
B) $16.00 per unit 
C) 22.00 per unit 
D) none of these

Question 17

Former NFL coach Joe Gibbs is highly sought after as a guest speaker. His fee can run as high as $150,000 for a single two-hour appearance. Recently, he was asked to speak at a seminar offered by the National Sports in Education Foundation (NSEF). Due to the charitable nature of the organization, Mr. Gibbs offered to speak for $100,000. NSEF planned to invite 350 guests who would each make a $500 contribution to the organization. The Foundation's executive director was concerned about committing so much of the organization's cash to this one event. So instead of the $100,000 fee she countered with an offer to pay Mr. Gibbs 50% of the revenue received from the seminar and no other payments.Required:
(a) Classify the two offers in terms of cost behavior (fixed vs. variable).Scenario A, NSEF pays Gibbs a $100,000 fee:
Scenario B, NSEF pays Gibbs 50% of revenue:
(b) Compute the budgeted income (assuming there are no other expenses) under each of the following scenarios:
1) NSEF agrees to pay the $100,000 fee, and 350 guests actually attend the seminar; and
2) NSEF pays Mr. Gibbs 50% of revenue, and 350 guests attend the seminar.(c) For each scenario ($100,000 fee vs. 50% of revenue), compute the percentage increase in profit that would result if the Foundation is able to increase attendance by 20 percent over the original plan (to a total of 420). (Round the percentages to the nearest whole numbers.)(d) For each scenario, compute NSEF's cost per contributor if 350 attend and if 420 contributors attend. (Round the cost per contributor to two decimal points.)(e) Summarize the impact on risk and profits of shifting the cost structure from fixed to variable costs.

Accepted Answer

(a) Cost behavior of the two offers:
$10

Question 18

A cost that is considered variable for one activity base may be considered fixed for a different activity base.

Accepted Answer

A) True 
 B)False

Question 19

The magnitude of operating leverage for Blue Ridge Corporation is 3.5 when sales are $200,000 and net income is $36,000. If sales decrease by 6%, net income is expected to decrease by what amount?

Accepted Answer

A) $2,160 
B) $7,560 
C) $3,420 
D) $1,260 
A) $2,160 
B) $7,560 
C) $3,420 
D) $1,260

Question 20

Blackstock Company manufactures digital cameras. Indicate whether the cost is a product cost or period cost AND 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 a period cost and variable. $$\begin{array} { | l | l | l | l | } 
\hline &  { \text { Cost Behavior } } \
\hline \text { Cost } & \text { Fixed } & \text { V ariable } & \text { Mixed } \
\hline \text { Insur ance on executive offices } & & & \
\hline \text { Lens caps for digital cameras } & & & \
\hline \text { Depreciation on manuf acturing equipment } & & & \
\hline \text { Shipping cost to defiver products to customers } & & & \
\hline \text { Salary of compary president } & & & \
\hline \text { Wages of assembly workers } & & & \
\hline \text { Product advertising } & & & \
\hline \begin{array} { l } 
\text { Utilities: electricity to nun machines and for } \
\text { heat and lights in factory }
\end{array} & & & \
\hline
\end{array}$$

Accepted Answer

The answer of Blackstock Company manufactures digital cameras. Indicate whether...

Select the incorrect statement regarding the use of average unit costs.

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 correct statement from the following.

Based on the following cost data, items labeled (a) and (b) in the table below are which of the following amounts, respectively? Number of units: 1,500 3,000 Total cost: Variable \ 7,500 \ 15,000 Fixed \ 6,000 \ 6,000 Cost per unit: Variable \ 5 (a) Fixed \ 4 (b)

How does fixed cost per unit behave when volume decreases?

The following information is given regarding driving lessons provided by Arrive Alive Company over several spans of time: Select the incorrect statement from the following. Length of Time TODAY ONE YEAR FIVE YEARS Total cost of lessons \ 600 \ 110,000 \ 508,000 Number of lessons 50 10,000 55,000

The contribution margin format income statement is not widely used for external financial reporting, but is allowed by GAAP.

In the graph below, which depicts the relationship between units produced and total cost, the dotted line depicts which type of total cost?

What is an activity base, and how does the activity base relate to a variable cost?

Operating leverage exists when:

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?

If a company shifts its cost structure by decreasing fixed costs and increasing variable costs, it will lower both the level of risk and its potential for profits.

Assuming that cost behavior did not change over the two-year period, what is the amount of the company's variable cost of goods sold per unit?

A cost that is considered variable for one activity base may be considered fixed for a different activity base.

The magnitude of operating leverage for Blue Ridge Corporation is 3.5 when sales are $200,000 and net income is $36,000. If sales decrease by 6%, net income is expected to decrease by what amount?

Management Accounting and Corporate Governance

Analysis of Cost, Volume, and Pricing to Increase Profitability

Cost Accumulation, Tracing, and Allocation

Cost Management in an Automated Business Environment: Abc, Abm, and Tqm

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Responsibility Accounting

Planning for Capital Investments

Product Costing in Service and Manufacturing Entities

Job-Order, Process, and Hybrid Costing Systems

Financial Statement Analysis

Statement of Cash Flows

Filters

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

Select the incorrect statement regarding the use of average unit costs.

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 correct statement from the following.

Based on the following cost data, items labeled (a) and (b) in the table below are which of the following amounts, respectively? Number of units: 1,500 3,000 Total cost: Variable \ 7,500 \ 15,000 Fixed \ 6,000 \ 6,000 Cost per unit: Variable \ 5 (a) Fixed \ 4 (b)

How does fixed cost per unit behave when volume decreases?

The following information is given regarding driving lessons provided by Arrive Alive Company over several spans of time: Select the incorrect statement from the following. Length of Time TODAY ONE YEAR FIVE YEARS Total cost of lessons \ 600 \ 110,000 \ 508,000 Number of lessons 50 10,000 55,000

The contribution margin format income statement is not widely used for external financial reporting, but is allowed by GAAP.

In the graph below, which depicts the relationship between units produced and total cost, the dotted line depicts which type of total cost?

What is an activity base, and how does the activity base relate to a variable cost?

Operating leverage exists when:

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?

If a company shifts its cost structure by decreasing fixed costs and increasing variable costs, it will lower both the level of risk and its potential for profits.

Assuming that cost behavior did not change over the two-year period, what is the amount of the company's variable cost of goods sold per unit?

A cost that is considered variable for one activity base may be considered fixed for a different activity base.

The magnitude of operating leverage for Blue Ridge Corporation is 3.5 when sales are $200,000 and net income is $36,000. If sales decrease by 6%, net income is expected to decrease by what amount?

Management Accounting and Corporate Governance

Analysis of Cost, Volume, and Pricing to Increase Profitability

Cost Accumulation, Tracing, and Allocation

Cost Management in an Automated Business Environment: Abc, Abm, and Tqm

Relevant Information for Special Decisions

Planning for Profit and Cost Control

Performance Evaluation

Responsibility Accounting

Planning for Capital Investments

Product Costing in Service and Manufacturing Entities

Job-Order, Process, and Hybrid Costing Systems

Financial Statement Analysis

Statement of Cash Flows

Filters