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

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Question 71

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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?

A) 0.17
B) 6.00
C) 2.25
D) none of these

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

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Question 72

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Companies with low operating leverage will experience lower profits when sales increase than will companies with higher operating leverage.

A) True
B) False

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Question 73

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The following information is for Companies M and N for the most recent year: $\begin{array} { | l | c | c | } \hline & \text { Company M } & \text { Company N } \\\hline \text { Sales } & \$ 500,000 & \$ 500,000 \\\hline \text { Variable costs } & \$ 300,000 & \$ 200,000 \\\hline \text { Fixed costs } & \$ 50,000 & \$ 150,000 \\\hline\end{array}$ Based on this information,which of the following statements is incorrect?

Operating leverage exists when:

Select the incorrect statement regarding fixed and variable costs.

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

Select the incorrect statement regarding the relevant range of volume.

What is a primary disadvantage of the high-low method of analyzing a mixed cost?

How does fixed cost per unit behave when volume decreases?

For the last two years BRC Company had net income as follows: $\begin{array}{l|c|c} & 2012 & 2013 \\\hline \text { Net Income } & \$ 160,000 & \$ 200,000\end{array}$ Change 2012 to Year 1 and 2013 to Year 2 What was the percentage change in income from Year 1 to Year 2?

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

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

If the company's volume doubles,the company's total cost will:

Craft,Inc.normally produces between 120,000 and 150,000 units each year.Producing more than 150,000 units alters the company's cost s

Frazier Company sells women's ski jackets.The average sales price is $275 and the variable cost per jacket is $175.Fixed Costs are $1,350,000.If Frazier sells 15,000 jackets,the contribution margin will be:

Based on the above data,which company has a higher operating leverage?

The higher the magnitude of a company's operating leverage,the smaller the decrease in profit for a given percentage decrease in revenue.

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

Compare least squares regression and the scattergraph method of analyzing mixed costs.

For a mixed cost,total cost increases in direct proportion to volume.