Question 1

If a profitable company has both fixed and variable costs,its operating leverage will always be greater than 1.

Accepted Answer

A) True 
 B)False

Question 2

Income statements for three companies are provided below:
 $\begin{array}{lccc}
& \text { Company A } & \text { Company B } & \text { Company C } \
\text {Sales (20 units)}& \$ 1,000& \$ 1,000& \$ 1,000\
\text {Less variable costs}& 600 & 300 &- \
\text {Less fixed costs}& 200 & 500 & 800 \
 \text {Net income}&\$200 & 200 & \$200 \

\end{array}$  Required:
(a)Prepare new income statements for the firms assuming each sells one additional unit (i.e.each firm sells 21 units)
(b)Briefly describe the effect of cost structure on profitability.

Accepted Answer

The answer of Income statements for three companies are provided...

Question 3

Based on the income statements shown below,which division has the cost structure with the highest operating leverage? $\begin{array}{c}
\begin{array}{l}
\
\text {Revenue}\
 \text {Variable costs}\
\text { Contribution margin }\
\text {Fixed costs}\
 \text {Net income}\
\end{array}  
\begin{array}{lll}
\text { Soft Drinks }\
\$50,000\
(10,000)\
40,000\
(30,000)\
\%10,000 
\end{array}
\begin{array}{c}
\text { Bottled Water }\
\$  50,000 \
 (5,000) \
 45,000 \
 (40,000) \
 \$  5,000
\end{array}
\begin{array}{lll}
\text { Fruit Juices }\
\$50,000\
(30,000)\
20,000\
(10,000)\
\$10,000
\end{array}
\end{array}$

Accepted Answer

A)  Bottled Water. 
B)  Fruit Juices. 
C)  Soft Drinks. 
D)  The three divisions have identical operating leverage.

Question 4

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

Question 5

The following income statement was produced when volume of sales was at 400 units. $\begin{array}{lrr}
  \text {  Sales Revenue } &\$2,000\
 \text {  Variable Cost } &\underline{1,200}\
 \text {  Contribution Margin} &\$800\
 \text {   Fixed Cost} &\underline{300}\
 \text {  Net Income } &\underline{\$500}\
\end{array}$
 If volume reaches 500 units,net income will be:

Accepted Answer

A)  $625 
B)  $1,800 
C)  $700 
D)  None of these

Question 6

ETutor is an online tutoring service provider that is particularly popular with college students.The company is interested in estimating the fixed and variable components of its tutoring services costs.The manager believes that these costs are driven by the number of hours of tutoring services provided.The following information was gathered for the last six months of business:
 $$\begin{array} { l c r } 
\text { Month } & \text { Number of Hours } & \text { Tutoring costs } \
\text { January } & 25,000 & \$ 308,000 \
\text { February } & 41,000 & 420,000 \
\text { March } & 29,000 & 352,000 \
\text { April } & 31,000 & 373,000 \
\text { May } & 34,000 & 378,000 \
\text { June } & 18,000 & 252,000
\end{array}$$ Required:
1)Compute the average tutoring cost per hour for the six-month period.(Round the average tutoring cost per hour to two decimal points.)
2)Use the high-low method to estimate the total fixed cost and the variable cost per hour.(Round the variable cost per hour to two decimal points.)
3)Name one advantage and one disadvantage of the high-low method.
4)Describe the scattergraph method that can be used to analyze mixed costs.

Accepted Answer

The answer of ETutor is an online tutoring service provider...

Question 7

Mark Company,Inc.sells electronics.The company generated sales of $45,000.Contribution margin is $20,000 and net income is $4,000.Based on this information,the magnitude of operating leverage is:

Accepted Answer

A)  2.25 
B)  11.25 
C)  5.00 
D)  6.25

Question 8

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 9

A low magnitude of operating leverage is best for most companies.

Accepted Answer

A) True 
 B)False

Question 10

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 total cost per unit will:

Accepted Answer

A)  stay the same. 
B)  decrease. 
C)  double as well. 
D)  increase but will not double.

Question 11

One reason for computing the average cost for a product rather than the actual cost is that average cost is easier to compute.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 cost of the salespersons' commissions is an example of:

Accepted Answer

A)  a fixed cost. 
B)  a variable cost. 
C)  a mixed cost. 
D)  none of these

Question 14

The higher the magnitude of a company's operating leverage,the more benefit the company will receive from a given percentage increase in revenue.

Accepted Answer

A) True 
 B)False

Question 15

A cost that is part selling cost and part manufacturing cost is referred to as a mixed cost.

Accepted Answer

A) True 
 B)False

Question 16

Select the incorrect statement regarding the contribution margin income statement.

Accepted Answer

A)  The contribution margin approach for the income statement is unacceptable for external reporting. 
B)  Contribution margin represents the amount available to cover product costs and thereafter to provide profit. 
C)  The contribution margin approach requires that all costs be classified as fixed or variable. 
D)  Assuming no change in fixed costs, a $1 increase in contribution margin will result in a $1 increase in profit.

Question 17

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

Accepted Answer

A)  manufacturing and selling, general, and administrative costs. 
B)  cost of goods sold and operating expenses. 
C)  variable and fixed costs. 
D)  mixed, variable and fixed costs.

Question 18

Which characteristic is true of the high-low method,the scattergraph method,and regression analysis?

Accepted Answer

A)  All methods will produce the same estimate of variable and fixed costs. 
B)  All methods use historic data to estimate variable and fixed costs. 
C)  All methods use only two data points in analyzing a mixed cost. 
D)  None of these are correct.

Question 19

What is operating leverage,and how does a company achieve operating leverage?

Accepted Answer

The answer of What is operating leverage,and how does a...

Question 20

If revenues are expected to decline,management should attempt to convert its variable costs into fixed costs.

Accepted Answer

A) True 
 B)False

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

If a profitable company has both fixed and variable costs,its operating leverage will always be greater than 1.

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?

Mark Company,Inc.sells electronics.The company generated sales of $45,000.Contribution margin is $20,000 and net income is $4,000.Based on this information,the magnitude of operating leverage is:

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.

A low magnitude of operating leverage is best for most companies.

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 total cost per unit will:

One reason for computing the average cost for a product rather than the actual cost is that average cost is easier to compute.

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

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 cost of the salespersons' commissions is an example of:

The higher the magnitude of a company's operating leverage,the more benefit the company will receive from a given percentage increase in revenue.

A cost that is part selling cost and part manufacturing cost is referred to as a mixed cost.

Select the incorrect statement regarding the contribution margin income statement.

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

Which characteristic is true of the high-low method,the scattergraph method,and regression analysis?

What is operating leverage,and how does a company achieve operating leverage?

If revenues are expected to decline,management should attempt to convert its variable costs into fixed costs.