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

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Question 51

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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?

A) $2,160
B) $7,560
C) $3,420
D) $1,260

E) A) and B)
F) A) and C)

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Question 52

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Based on the following operating data,the operating leverage is: $\begin{array} { | l | r | } \hline \text { Sales } & \$ \quad 500,000 \\\hline \text { Variable costs } & 280,000 \\\hline \text { Contribution margin } & 220,000 \\\hline \text { Fired costs } & 180,000 \\\hline \text { Income from operations } & \$ 40,000 \\\hline\end{array}$

A) 0.18
B) 5.50
C) 1.22
D) 12.5

E) All of the above
F) B) and C)

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Question 53

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Assume that Microsoft and Sony both plan to introduce a new hand-held video game.Microsoft plans to use a heavily automated production process to produce its product while Sony plans to use a labor-intensive production process.The following revenue and cost relationships are provided: $\begin{array}{c}\begin{array}{|l|}\hline\\\hline \text {Selling price per unit}\\\hline \text {Variable costs per unit}\\\hline \text {Direct materials}\\\hline \text {Direct labor}\\\hline \text {Overhead}\\\hline \text {Selling and administrative}\\\hline \text {Annual fixed costs}\\\hline \text {Overhead}\\\hline \text {Selling and administrative}\\\hline\end{array}\begin{array}{l|}\hline \text {Micros oft Game}\\\hline150\\\hline\\\hline\$ 27.00 \\ \hline 7.50 \\ \hline 7.50 \\ \hline 3.00 \\ \hline\\\hline\$ 600,000 \\ \hline 135,000 \\ \hline \end{array}\begin{array}{l|}\hline \text {Sony Game}\\\hline150\\\hline\\\hline\$ 27.00 \\ \hline 30.00 \\ \hline 30.00 \\ \hline 3.00 \\ \hline\\\hline\$ 240,000 \\ \hline 135,000 \\ \hline\end{array}\end{array}$ Required: (a)Compute the contribution margin per unit for each company. (b)Prepare a contribution income statement for each company assuming each company sells 8,000 units. (c)Compute each firm's net income if the number of units sold increases by 10%. (d)Which firm will have more stable profits when sales change? Why?

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

The variable cost per unit increases in direct proportion to the activity base.

Select the correct statement regarding fixed costs.

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

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

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

In regression analysis,an r-square value of one indicates that there is a perfect fit between the independent and dependent variables.

If a company had a mixed cost s

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

Companies A and B are in the same industry and are identical except for cost s

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?

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

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

The following income statement is provided for Ramirez Company for the current year: $\begin{array}{|l|r|}\hline \text { Sales revenue }(2,500 \text { units } x \$ 40 \text { per unit }) & \$ \quad 100,000\\\hline \text { Cost of goods sold (varable; } 2,500 \text { units x } \$ 16 \text { per unit) } & (40,000) \\\hline \text { Cost of goods sold (fixed) } & (8,000) \\\hline \text { Gross margin } & 52,000 \\\hline \text { Administrative salaries } & (12,000) \\\hline \text { Depreciation } & (8,000) \\\hline\text { Supplies }(2,500 \text { units x } \$ 4 \text { per unit) } & (10,000) \\\hline \text { Net income } &\$ \quad 22,000\\\hline\end{array}$ What amount was the company's contribution margin?

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

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?