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

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Question 101

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Newton Company currently produces and sells 4,000 units of a product that has a contribution margin of $6 per unit. The company sells the product for a sales price of $20 per unit. Fixed costs are $18,000. The company is considering investing in new technology that would decrease the variable cost per unit to $8 per unit and double total fixed costs. The company expects the new technology to increase production and sales to 9,000 units of product. What sales price would have to be charged to earn a $99,000 target profit assuming the investment in technology is made?

A) $22
B) $23
C) $15
D) $13

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Question 102

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Fixed cost per unit:

A) decreases as production volume decreases.
B) is not affected by changes in the production volume.
C) decreases as production volume increases.
D) increases as production volume increases.

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Question 103

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

Jarvis Company produces a product that has a selling price of $20.00 and a variable cost of $15.00 per unit. The company's fixed costs are $50,000. What is the break-even point measured in sales dollars?

Multiple regression analysis should be performed when a single independent variable influences multiple dependent variables.

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

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: $\begin{array}{|l|r|r|}\hline \text { Month } & \text { Number of Hours } & \\\hline \text { January } & 25,000 & \text { Tutoring costs } \\\hline \text { February } & 41,000 & \$ 308,000 \\\hline \text { March } & 29,000 & 420,000 \\\hline \text { Apnl } & 31,000 & 352,000 \\\hline \text { May } & 34,000 & 373,000 \\\hline \text { June } & 18,000 & 378,000 \\\hline\end{array}$ Required: 1) Compute the average tutoring cost per hour for the six-month period. 2) Use the high-low method to estimate the total fixed cost and the variable cost per hour. 3) Name one advantage and one disadvantage of the high-low method. 4) Describe the scatter graph method that can be used to analyze mixed costs.

Select the correct statement regarding fixed costs.

The margin of safety ratio can be defined as the:

The excess of a product's selling price over its variable costs is referred to as:

At the break-even point:

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 the company's annual fixed general, selling, and administrative cost?

Select the incorrect statement regarding cost structures.

Which of the following items would not be found on a contribution format income statement?

What advantages does the regression method of cost estimation offer, compared to the high-low and scatter graph methods of estimating mixed costs?

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

Falls Company has a contribution margin of $32 per unit and fixed costs of $500,000, and it desires to earn a profit of $100,000. What is the sales volume in units required to achieve this desired profit?

Company A has break-even sales of 90,000 units and budgeted sales of 99,000 units. What is the margin of safety as expressed as a percentage?

Variable costs will become fixed outside the relevant range.

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.