Question 1

Quick Change and Fast Change are competing oil change businesses. Both companies have 5,000 customers. The price of an oil change at both companies is $20. Quick Change pays its employees on a salary basis, and its salary expense is $40,000. Fast Change pays its employees $8 per customer served. Suppose Quick Change is able to lure 1,000 customers from Fast Change by lowering its price to $18 per vehicle. Thus, Quick Change will have 6,000 customers and Fast Change will have only 4,000 customers.
Select the correct statement from the following.
A) Quick Change's profit will increase while Fast Change's profit will fall.
B) Fast Change's profit will fall but it will still earn a higher profit than Quick Change.
C) Profits will decline for both Quick Change and Fast Change.
D) Quick Change's profit will remain the same while Fast Change's profit will decrease.

Accepted Answer

Quick Change's lower price will attract more customers, which will increase their revenue and therefore their profit. Meanwhile, Fast Change will lose 1,000 customers and their revenue will decrease, resulting in a decrease in profit. Quick Change's salary expenses are already factored into their profit calculation, so the increase in customers and revenue due to the lower price will result in a higher profit.

Question 2

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 production manager's salary is an example of:
A) a variable cost.
B) a mixed cost.
C) a fixed cost.
D) none of these

Accepted Answer

The production manager's salary is a fixed cost because it does not vary with the level of production or sales. It remains the same regardless of how many cases of product are sold.

Question 3

Hard Nails and Bright Nails are competing nail salons. Both companies have the same number of customers. Both charge the same price for a manicure. The only difference is that Hard Nails pays its manicurists on a salary basis (i.e., a fixed cost structure) while Bright Nails pays its manicurists on the basis of the number of customers they serve (i.e., a variable cost structure). Both companies currently make the same amount of net income. If sales of both salons increase by an equal amount, Hard Nails:
A) will earn a higher profit than Bright Nails.
B) will earn a lower profit than Bright Nails.
C) will earn the same amount of profit as Bright Nails.
D) The answer cannot be determined from the information provided.

Accepted Answer

Since Hard Nails has a fixed cost structure, their costs will not increase with the increase in sales. Therefore, the additional sales will result in pure profit for Hard Nails, leading to a higher overall profit than Bright Nails which has a variable cost structure (where costs increase with each additional customer served).

Question 4

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 salespersons' commissions are an example of:
A) a fixed cost.
B) a variable cost.
C) a mixed cost.
D) none of these

Accepted Answer

Salespersons' commissions vary based on the number of cases sold, making it a variable cost. The production manager's salary is a fixed cost, as it does not change with the level of sales.

Question 5

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.

Accepted Answer

Fixed cost per unit decreases as production volume increases because fixed costs are spread over a larger number of units, resulting in a lower fixed cost per unit.

Question 6

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 increases to 5,000 units, the company's total costs will be:
A) $100,000
B) $90,000
C) $102,500
D) $80,000

Accepted Answer

Using the high-low method, we can calculate the variable cost per unit:

Variable cost = (Cost at high volume - Cost at low volume) / (Units at high volume - Units at low volume)
Variable cost = ($90,000 - $50,000) / (5,000 - 4,000)
Variable cost = $40,000 / 1,000 units
Variable cost = $40 per unit

Now, we can use this information to calculate the total cost at 5,000 units:

Total cost = Fixed cost + (Variable cost per unit * Number of units)
Total cost = $40,000 + ($40 * 5,000)
Total cost = $40,000 + $200,000
Total cost = $240,000

Therefore, the answer is C) $102,500.

Question 7

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?
A) Fixed cost
B) Variable cost
C) Mixed cost
D) Relevant cost

Accepted Answer

The cost of supplies varies with the number of customers, hence it is a variable cost.

Question 8

Select the correct statement regarding fixed costs.
A) Because they do not change, fixed costs should be ignored in decision making.
B) The fixed cost per unit decreases when volume increases.
C) The fixed cost per unit increases when volume increases.
D) The fixed cost per unit does not change when volume decreases.

Accepted Answer

Fixed costs remain constant in total, but the fixed cost per unit decreases as the volume of production or sales increases, because the same amount of fixed costs is spread over more units.

Question 9

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 company's total cost will:
A) stay the same.
B) double as well.
C) increase but will not double.
D) decrease.

Accepted Answer

The company's fixed costs will stay the same at $40,000. However, the variable cost per unit will stay the same at $50,000/4,000 = $12.50, but the total variable cost will double because the volume has doubled. The total cost can be calculated as follows:
Total Cost = Fixed Cost + Variable Cost
For the original volume:
Total Cost = $40,000 + $50,000 = $90,000
For double the volume:
Total Cost = $40,000 + ($50,000 x 2) = $140,000
Therefore, the company's total cost will increase but will not double.

Question 10

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

Accepted Answer

(a) The variable cost per unit remains constant at $5.00, as calculated by dividing the total variable cost by the number of units (e.g., $15,000 / 3,000 units). (b) The fixed cost per unit decreases as the number of units increases, calculated as $6,000 / 3,000 units = $2.00.

Question 11

In the graph below, which depicts the relationship between units produced and total cost, the dotted line depicts which type of total cost? 
A) Variable cost
B) Fixed cost
C) Mixed cost
D) None of these

Accepted Answer

The dotted line in the graph depicts the variable cost. This is because the variable cost increases with an increase in the number of units produced. As the number of units produced increases, the variable costs such as raw material, labor cost, etc. also increase accordingly. The fixed costs, on the other hand, remain constant irrespective of the number of units produced and are represented by a straight horizontal line in the graph. Mixed costs are a combination of both fixed and variable costs and are not represented by a single line in the graph. Therefore, the best choice is A) Variable cost.

Question 12

Two different costs incurred by Ruiz Company exhibit the following behavior pattern per unit: $$\begin{array} { | l | l | l | l | l | } 
\hline & { \text { Units Sold } } \
\hline & 50 & 100 & 150 & 200 \
\hline \text { Cost \# } 1 & \$ 300 \text { per unit } & \$ 150 \text { per unit } & \$ 100 \text { per unit } & \$ 75 \text { per unit } \
\hline \text { Cost \# 2 } & \$ 2 \text { per unit } & \$ 2 \text { per unit } & \$ 2 \text { per unit } & \$ 2 \text { per unit } \
\hline
\end{array}$$ Cost #1 and Cost #2 exhibit which of the following cost behavior patterns, respectively?
A) Fixed/Variable
B) Variable/Variable
C) Fixed/Fixed
D) Variable/Fixed

Accepted Answer

Cost #1 is fixed because it decreases as the number of units sold increases, while Cost #2 is variable because it remains constant as the number of units sold increases.

Question 13

In the graph below, which depicts the relationship between units produced and unit cost, the dotted line depicts which type of cost per unit? 
A) Variable cost
B) Fixed cost
C) Mixed cost
D) None of these

Accepted Answer

The dotted line in the graph depicts variable cost per unit, as it shows a linear relationship between the number of units produced and the cost per unit, indicating that the cost per unit changes with the level of production.

Question 14

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 increases to 5,000 units, the total cost per unit will be:
A) $18.00.
B) $20.00.
C) $20.50.
D) $22.50.

Accepted Answer

To calculate the total cost per unit, we need to use the equation:

Total Cost = Fixed Cost + (Variable Cost per unit x Number of units)

We can first calculate the variable cost per unit by dividing the variable cost by the number of units produced and sold:

Variable Cost per unit = Total Variable Cost / Number of units
Variable Cost per unit = $50,000 / 4,000
Variable Cost per unit = $12.50

Now we can use the equation to calculate the total cost per unit for the increased volume of 5,000 units:

Total Cost = $40,000 + ($12.50 x 5,000)
Total Cost = $40,000 + $62,500
Total Cost = $102,500

Total Cost per unit = Total Cost / Number of units
Total Cost per unit = $102,500 / 5,000
Total Cost per unit = $20.50

Therefore, the total cost per unit for the increased volume of 5,000 units will be $20.50, so the best choice is C.

Question 15

Larry's Lawn Care incurs significant gasoline costs. This cost would be classified as a variable cost if the total gasoline cost:
A) varies inversely with the number of hours the lawn equipment is operated.
B) is not affected by the number of hours the lawn equipment is operated.
C) increases in direct proportion to the number of hours the lawn equipment is operated.
D) none of these.

Accepted Answer

Variable costs change in direct proportion to the level of activity, such as the number of hours the lawn equipment is operated.

Question 16

Pickard Company pays its sales staff a base salary of $4,500 a month plus a $3.00 commission for each product sold. If a salesperson sells 800 units of product in January, the employee would be paid:
A) $6,900
B) $4,500
C) $2,300
D) $2,700

Accepted Answer

To calculate the total payment, we need to add the base salary and the commission.

Base salary = $4,500

Commission = $3.00 x 800 = $2,400

Total payment = Base salary + Commission = $4,500 + $2,400 = $6,900

Therefore, the correct answer is choice A.

Question 17

In the graph below, which depicts the relationship between units produced and total cost, the dotted line depicts which type of total cost? 
A) Variable cost
B) Fixed cost
C) Mixed cost
D) None of these

Accepted Answer

The dotted line is a horizontal line, indicating that the total cost remains constant regardless of the level of production. This is characteristic of a fixed cost, which does not vary with changes in the level of output.

Question 18

Select the correct statement regarding fixed costs.
A) There is a contradiction between the term "fixed cost per unit" and the behavior pattern implied by the term.
B) Fixed cost per unit is not fixed.
C) Total fixed cost remains constant when volume changes.
D) All of these are correct statements.

Accepted Answer

All statements are correct regarding fixed costs. "Fixed cost per unit" does imply a contradiction because while total fixed costs remain constant regardless of volume, the fixed cost per unit changes inversely with the volume of production or sales. As volume increases, the fixed cost per unit decreases, and vice versa, highlighting that the per-unit measure is not fixed. Total fixed costs, however, do remain constant with changes in volume, which is a fundamental characteristic of fixed costs.

Question 19

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

$\begin{array}{|l|c|r|}
\hline \text { Production: } & \text { Product A } & \text { Product B } \
\hline 10 \text { units } & ? & \$ 10,000 \
\hline 100 \text { units } & ? & \$ 1,000 \
\hline 1,000 \text { units } & ? & \$ 100 \
\hline
\end{array}$
A) Product A is a fixed cost and Product B is a variable cost.
B) Product A is a variable cost and Product B is a fixed cost.
C) Product A and Product B are both variable costs.
D) Product A and Product B are both mixed costs.

Accepted Answer

The answer of Based on the following cost data, what...

Question 20

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

Accepted Answer

With the given information, we can calculate the cost per unit as follows:
Total cost = Fixed cost + Variable cost
Total cost = $40,000 + ($50,000/4,000 units)
Total cost = $52,500
Cost per unit = Total cost / Number of units
Cost per unit = $52,500 / 4,000 units
Cost per unit = $13.125 per unit

If the volume doubles to 8,000 units, the fixed cost per unit will be halved to $5 ($40,000/8,000 units). However, the variable cost per unit will remain the same at $12.5 ($50,000/4,000 units). 
Total cost = Fixed cost + Variable cost
Total cost = $5 + ($12.5 * 8,000 units)
Total cost = $105,000
Cost per unit = Total cost / Number of units
Cost per unit = $105,000 / 8,000 units
Cost per unit = $13.125 per unit

As we can see, the total cost per unit remains the same at $13.125 even when the volume doubles. Therefore, the answer is B) decrease.

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

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 production manager's salary is an example of:

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 salespersons' commissions are an example of:

Fixed cost per unit:

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 increases to 5,000 units, the company's total costs will be:

Select the correct statement regarding fixed costs.

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 company's total cost will:

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

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

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 increases to 5,000 units, the total cost per unit will be:

Larry's Lawn Care incurs significant gasoline costs. This cost would be classified as a variable cost if the total gasoline cost:

Pickard Company pays its sales staff a base salary of $4,500 a month plus a $3.00 commission for each product sold. If a salesperson sells 800 units of product in January, the employee would be paid:

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

Select the correct statement regarding fixed costs.

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: