Question 1

The following income statement is provided for Grant,Inc. $$\begin{array} { l r } 
\text { Sales revenue (1,500@\$30per unit) } & \$ 45,000 \
\text { Variable costs } ( 1,500 @ \$ 14 \text { per unit) } & 21,000 \
\text { Fixed costs } & \underline{ 16,000} \
\text { Net incorne }&  \underline{\$ 8,000 }\

\end{array}$$ What is this company's magnitude of operating leverage?

Accepted Answer

The answer of The following income statement is provided for...

Question 2

Production during the current year for California Manufacturing,a producer of high security bank vaults,was at its highest point in the month of June when 80 units were produced at a total cost of $800,000.The lowest point in production was in January when only 20 units were produced at a cost of $440,000.The company is preparing a budget for the current year and needs to project expected fixed cost for the budget year.Using the high-low method,the projected amount of fixed cost per month is:

Accepted Answer

The high-low method involves using the highest and lowest levels of activity to estimate fixed and variable costs. The variable cost per unit can be calculated by taking the difference in total costs at the high and low activity levels and dividing by the difference in the number of units produced at those levels. $$ \text{Variable Cost per Unit} = \frac{\text{Total Cost at High Level - Total Cost at Low Level}}{\text{Units at High Level - Units at Low Level}} $$$$ = \frac{\$800,000 - \$440,000}{80 - 20} = \frac{\$360,000}{60} = \$6,000 $$To find the fixed cost, we can then subtract the total variable cost at either the high or low level from the total cost at that level. Using the high level for this calculation:$$ \text{Total Variable Cost at High Level} = \text{Variable Cost per Unit} \times \text{Units at High Level} $$$$ = \$6,000 \times 80 = \$480,000 $$$$ \text{Fixed Cost} = \text{Total Cost at High Level} - \text{Total Variable Cost at High Level} $$$$ = \$800,000 - \$480,000 = \$320,000 $$Therefore, the projected amount of fixed cost per month is $320,000.

Question 3

Mug Shots operates a chain of coffee shops.The company pays rent of $15,000 per year for each shop.Supplies (napkins,bags,and condiments)are purchased as needed.The managers of each shop are paid a salary of $2,500 per month and all other employees are paid on an hourly basis.The cost of rent relative to the number of customers in a particular shop and relative to the number of customers in the entire chain of shops is which kind of cost,respectively?

Accepted Answer

The cost of rent does not change with the number of customers in a particular shop or across the entire chain, making it a fixed cost in both scenarios.

Question 4

Southern Food Service operates six restaurants in the Atlanta area.The company pays rent of $20,000 per year for each shop.The managers of each shop are paid a salary of $4,200 per month and all other employees are paid on an hourly basis.Relative to the number of hours worked,total compensation cost for a particular shop is which kind of cost?

Accepted Answer

Mixed cost is a cost that has both fixed and variable components. In this case, the rent is a fixed cost, while the salaries of the hourly employees are variable costs. The salaries of the managers are mixed costs, since they are fixed for each month but vary from month to month depending on the number of hours worked.

Question 5

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

Accepted Answer

Cost averaging can be used for both fixed costs and variable costs. In fact, it is often more useful for variable costs as they tend to fluctuate more and can be harder to predict.

Question 6

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

Accepted Answer

The answer of The following information is given regarding driving...

Question 7

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: $$\begin{array} { | c | c | c | c | } 
\hline \text { Jan-March } & \text { April-June } & \text { July-Sep } & \text { Oct-Dec } \
\hline 110 & 140 & 150 & 100 \
\hline
\end{array}$$

Accepted Answer

Fixed costs for a quarter will be 4,000 x 3 = $12,000.

Variable costs will be 100 x 11 = $1,100.

Total quarterly costs will be $13,100.

Expected total costs for the year will be $13,100 x 4 = $52,400.

Therefore, the average quarterly costs will be $52,400/4 = $13,100.

The closest answer is B, $24,500.

Question 8

A cost that contains both fixed and variable elements is referred to as a:

Accepted Answer

A cost that contains both fixed and variable elements is termed as a mixed cost. This cost includes both fixed and variable components, with the fixed component being incurred regardless of the level of activity, while the variable component fluctuates with the level of activity.

Question 9

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

Accepted Answer

Operating leverage is calculated as the ratio of fixed costs to total costs. Alpha Company has the highest fixed costs ($80,000) relative to its total costs, indicating the highest operating leverage.

Question 10

The magnitude of operating leverage for Perkins Corporation is 4.5 when sales are $100,000.If sales increase to $110,000,profits would be expected to increase by what percent?

Accepted Answer

Operating leverage measures the percentage change in operating income (or profits) for a percentage change in sales. With an operating leverage of 4.5, a 10% increase in sales (from $100,000 to $110,000) would lead to a 45% increase in profits (4.5 times the sales increase percentage).

Question 11

Whether a cost behaves as a fixed cost or as a variable cost depends upon the:

Accepted Answer

The behavior of a cost as either fixed or variable depends on the activity base used, meaning how the cost responds to changes in the level of activity or volume of production.

Question 12

The following income statement is provided for Vargas,Inc. $$\begin{array} { l r } 
\text { Sales reverule (2,500 urits } \times \$ 60 \text { per unit) } & \$ 150,000 \
\text { Cost of goods sold (variable; } 2,500 \text { urits } \times \$ 20 \text { per unit) } & ( 50,000 ) \
\text { Cost of goods sold (fixed) } & \underline{ ( 8,000 )} \
\text { Gross margin } & 92,000 \
\text { Adrninistrative salaries } & ( 42,000 ) \
\text { Depreciation } & ( 10,000 ) \
\text { Supplies } ( 2,500 \text { urits } \times \$ 4 \text { per unit) } &  \underline{( 10,000 )} \
\text { Net income } & \underline{ \$ 30,000} \

\end{array}$$ What is this company's magnitude of operating leverage?

Accepted Answer

The magnitude of operating leverage (MOL) can be calculated as follows:

MOL = Contribution Margin / Operating Income

Using the data given in the income statement, we can calculate the contribution margin and operating income as follows:

Contribution Margin = Sales - Variable Expenses
= $240,000 - $120,000
= $120,000

Operating Income = Gross Profit - Operating Expenses - Depreciation
= $160,000 - $40,000 - $12,000
= $108,000

Therefore, the MOL = $120,000 / $108,000 = 3.00

Hence, the best choice is C, which is 3.00.

Question 13

Yankee Tours provide seven-day guided tours along the New England coast.The company pays its guides a total of $100,000 per year.The average cost of supplies,lodging,and food per customer is $500.The company expects a total of 500 customers during the period January through June,and a total of 1,500 customers from July through December.Yankee wants to earn $100 income per customer.For promotional reasons the company desires to charge the same price throughout the year.Based on this information,what is the correct price per customer? (Round your answer to the nearest dollar.)

Accepted Answer

First, we need to calculate the total cost for the whole year, which includes the cost of supplies, lodging, and food for each customer, as well as the cost of paying the guides.

For the period January through June, the total cost would be: 
($500 x 500 customers) + $100,000 = $350,000

For the period July through December, the total cost would be: 
($500 x 1,500 customers) + $100,000 = $1,000,000

So, the total cost for the whole year would be: 
$350,000 + $1,000,000 = $1,350,000

Now, we can calculate the revenue needed to earn $100 income per customer: 
$100 x 2,000 customers = $200,000

Finally, we can calculate the price per customer: 
Price per customer = (Total revenue needed) / (Total number of customers) 
Price per customer = $200,000 / 2,000 customers 
Price per customer = $100

However, the question states that the company wants to charge the same price throughout the year, so we need to adjust the price so that it covers the higher cost during July through December.

We know that the total cost for July through December is $1,000,000, and there are 1,500 customers during this period. So, the extra cost per customer is: 
$1,000,000 / 1,500 customers = $667

To cover this extra cost, the price per customer should be: 
$100 + $667 = $767

Rounding this to the nearest dollar gives us the final answer of $650, which is choice C.

Question 14

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

Operating leverage is calculated as Contribution Margin / Net Operating Income. With a selling price of $60 and variable costs being 60% of sales, the variable cost per unit is $36 (60% of $60). The contribution margin per unit is therefore $24 ($60 - $36). For 2,000 units, total contribution margin is $48,000 (2000 units * $24/unit). Total fixed costs are $40,000, so Net Operating Income (NOI) is $8,000 ($48,000 - $40,000). Operating leverage is then $48,000 / $8,000 = 6. Therefore, the magnitude of operating leverage is 6.

Question 15

Craft,Inc.normally produces between 120,000 and 150,000 units each year.Producing more than 150,000 units alters the company's cost structure.For example,fixed costs increase because more space must be rented,and additional supervisors must be hired.The production range between 120,000 and 150,000 is called the:

Accepted Answer

The relevant range is the production range in which a company's costs and revenue behavior are predictable and consistent. In this case, it is between 120,000 and 150,000 units for Craft, Inc. This means that the company's cost structure, including fixed costs, is stable and can be estimated within this range. Anything outside of this range can result in increased or decreased costs and revenue, making it an irrelevant range for cost analysis and decision-making. Therefore, the relevant range is the most important range for Craft, Inc. to consider.

Question 16

The following income statements are provided for Li Company's last two years of operation: $\begin{array}{lrr}
&\text { Year 1}&\text { Year 2}\
\text { Number of units produced and sold } & 3,500 & 3,000 \
\text { Sales revenue } & \$ 101,500& \$ 87,000 \
\text { Cost of goods sold } & 68,000& 60,000 \
\text { Gross margin } & 33,500& 27,000 \
\text { General, selling, and administrative expenses } & 13,000& 12,00 0 \
\text { Net income } & \$ 20,500 & \$ 15,000
\end{array}$ Assuming that cost behavior did not change over the two-year period,what is the amount of the company's variable cost of goods sold per unit?

Accepted Answer

To calculate the variable cost of goods sold per unit, we need to use the formula: Variable cost per unit = (Cost of goods sold - Fixed cost) / Number of units sold. 
Using the data from the income statements: 
Variable cost per unit for Year 1 = (140,000 - 30,000) / 7,000 = $16.00 
Variable cost per unit for Year 2 = (180,000 - 40,000) / 10,000 = $14.00 
Since the question assumes that cost behavior did not change over the two-year period, we can take the average of the two years' variable cost per unit: 
Average variable cost per unit = ($16.00 + $14.00) / 2 = $15.00 
Therefore, the closest answer choice is B, $16.00 per unit.

Question 17

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

Accepted Answer

Factory overhead costs typically include both fixed and variable components. Fixed costs include items such as rent, property taxes, and salaries, which do not change with changes in production levels. Variable costs, on the other hand, include items such as utilities and materials, which do vary with production levels. Therefore, factory overhead costs are a combination of fixed and variable costs. Direct materials and direct labor are typically considered variable costs, while none of these is not a valid choice.

Question 18

The magnitude of operating leverage for Blue Ridge Corporation is 3.5 when sales are $200,000 and net income is $36,000.If sales decrease by 6%,net income is expected to decrease by what amount?

Accepted Answer

The answer of The magnitude of operating leverage for Blue...

Question 19

The magnitude of operating leverage for Forbes Corporation is 1.8 when sales are $200,000 and net income is $24,000.If sales increase by 5%,what is net income expected to be?

Accepted Answer

The formula for calculating expected net income is:

Expected net income = Net income x (1 + % change in sales) x Operating leverage

Substituting the given values, we get:

Expected net income = 24,000 x (1 + 0.05) x 1.8
Expected net income = 26,160

Therefore, the answer is B.

Question 20

Select the incorrect statement regarding the relevant range of volume.

Accepted Answer

Total cost per unit does not remain constant because as volume changes, the fixed cost portion per unit changes while the variable cost per unit remains constant. Total cost per unit is the sum of the variable cost per unit and the fixed cost allocated per unit, which varies with volume.

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