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

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Question 21

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What are the expected average quarterly costs of running a consulting practice if fixed costs are expected to be $4,000 a month and variable costs are expected to be $100 per client for each quarter? Expected number of clients for the year are: $\begin{array} { | c | c | c | c | } \hline \text { Jan-March } & \text { April-June } & \text { July-Sep } & \text { Oct-Dec } \\\hline 110 & 140 & 150 & 100 \\\hline\end{array}$

A) $12,500
B) $24,500
C) $16,500
D) $19,500

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Question 22

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Which of the following costs typically include both fixed and variable components?

A) Direct materials
B) Direct labor
C) Factory overhead
D) None of these

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Question 23

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Based on the following cost data, what conclusions can you make about the costs of Product A and Product B? $\begin{array}{|l|r|c|}\hline &{\text { Total Cost }} \\\hline \text { Production: } & \text { Product A } & \text { Product B } \\\hline 10 \text { units } & \$ 100 & ? \\\hline 100 \text { units } & \$ 1,000 & ? \\\hline 1,000 \text { units } & \$ 10,000 & ? \\\hline&\text { Unit Cost }\\\hline \text { Production: } & \text { Product A } & \text { Product B } \\\hline 10 \text { units } & ? & \$ 10,000 \\\hline 100 \text { units } & ? & \$ 1,000 \\\hline 1,000 \text { units } & ? & \$ 100 \\\hline\end{array}$

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

Descriptions of cost behavior as fixed or variable pertain to a particular range of activity.

Select the correct statement regarding fixed costs.

Cannon Company operates a clothing store that reported the following operating results for the current year: Required: Prepare an income statement for Cannon Company using the contribution margin format. $\begin{array}{|l|c|}\hline\text { Income Statement }\\\hline \text { Sales revenue } & \$ 2,000,000 \\\hline \text { Cost of goods sold } & (1,200,000) \\\hline \text { Gross margin } & \$ 800,000 \\\hline \text { Employee commissions and bonuses ( } \% \% \text { of sales) } & (100,000) \\\hline \text { Depreciation expense } & (150,000) \\\hline \text { Salaries expense } & (260,000) \\\hline \text { Shipping and delivery expense (2\% of sales) } & (40,000) \\\hline \text { Advertising expense } & (80,000) \\\hline \text { Net income } & \$ 170,000 \\\hline\end{array}$

Variable costs will become fixed outside the relevant range.

What are mixed or semivariable costs? Give an example of a mixed cost.

Select the incorrect statement regarding the relevant range of volume.

Select the incorrect statement regarding fixed and variable costs.

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

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

Why would a company need to estimate the fixed and variable components of a mixed cost?

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

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

Based on the income statements of the three following retail businesses, which company has the highest operating leverage? $\begin{array} { | l | r | r | r | } \hline & { \text { Alpha Company } } & { \text { Beta Company } } & \text { Gamma Company } \\\hline \text { Revenue } & \$ 200,000 & \$ 200,000 & \$ 200,000 \\\hline \text { Variable costs } & ( 95,000 ) & ( 155,000 ) & ( 125,000 ) \\\hline \text { Contribution margin } & \$ 105,000 & \$ 45,000 & \$ 75,000 \\\hline \text { Fixed costs } & ( 80,000 ) & ( 20,000 ) & ( 50,000 ) \\\hline \text { Net income } & \$ 25,000 & \$ 25,000 & \$ 25,000 \\\hline\end{array}$

Assuming that cost behavior did not change over the two-year period, what is the company's annual fixed general, selling, and administrative cost?

How is operating leverage related to cost structure?

What total amount of net income will Harlowe, Inc. earn if it experiences a 10 percent increase in revenue?