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

Select the correct statement regarding fixed costs.

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.

Risk refers to the possibility that sacrifices may exceed benefits.

The variable cost per unit increases in direct proportion to the activity base.

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.

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:

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

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.

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?

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

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

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

The manager of Kenton Company stated that 45% of its total costs were fixed. The manager was describing the company's:

Wayans Company has a contribution margin ratio of 60%. This means that its variable costs are 60% of sales.

The following income statements are provided for Li Company's last two years of operation: Assuming that cost behavior did not change over the two year period, what is Li Company's contribution margin in 2013?

The total variable cost increases in direct proportion to volume.

How does fixed cost per unit behave when volume decreases?

Phan Company has not reported a profit in five years. This year the company would like to narrow its loss to $7,500. Assuming its selling price is $36.50 per unit and its variable costs per unit are $24, how many units must be sold to achieve its target given that total fixed costs are $60,000?

The results below represent what form of cost behavior? 2012 2013 Units 4,500 4,800 Total Cost \1 1,250 \1 2,000

Chicago Company incurs annual fixed costs of $80,000. Variable costs are $3.00 per unit, and the sales price is $10 per unit. Chicago desires to earn an annual profit of $60,000. Required: Use the contribution margin ratio approach to determine the sales volume in dollars and units needed to earn the desired profit.