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

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Question 41

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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 to nearest dollar)

A) $450
B) $500
C) $650
D) $700

E) None of the above
F) A) and B)

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Question 42

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

A) True
B) False

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Question 43

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Risk refers to the possibility that sacrifices may exceed benefits.

Assume that the management of Dairy Deli wants to expand operations. To help evaluate the risks involved in opening an additional store, the company president wants to know the amount of fixed cost a new store will likely incur. Management uses the regression method to analyze the company's mixed costs. In terms of interpreting the results:

Based on the above information, select the correct statement. $\begin{array}{|l|c|c|c|}\hline \text { Units sold } & 20 & 40 & 60 \\\hline \text { Total salary cost } & \$ 6,000 & \$ 7,800 & \$ 9,200 \\\hline \text { Total cost of goods sold } & 14,000 & 28,000 & 42,000 \\\hline \text { Depreciation cost per unit } & \$ 120 & \$ 60 & \$40 \\\hline\end{array}$

What is operating leverage, and how does a company achieve operating leverage?

Select the term from the list provided that best matches each of the following descriptions. The first is done for you.

Phoenix Corporation manufactures smartphones, generally selling from 200,000 to 300,000 units per year. The following cost data apply to the activity levels shown: $\begin{array}{|l|c|c|c|c|}\hline\text { Number of Units} & 200,000&250,000&300,000 \\\hline\text {Total costs } \\\hline\text { Fixed }& \$15,000,000 \\\hline \text {Variable} & 24,000,000 \\\hline\text { Total costs }& \$ 39,000,000 \\\hline\\\hline \text { Cost per Unit } \\\hline \text { Fixed } &\$75\\\hline \text { Variable }&120 \\\hline \text { Total cost per unit }&\$195 \\\hline\end{array}$ Required: 1.) Complete the preceding table by filling the missing amounts for 250,000 and 300,000 units.2.) Assume that Phoenix actually makes 280,000 units. What would be the total costs and the cost per unit at this level of activity? (Round the cost per unit to two decimal points)3.) If Phoenix sells each unit for $220, what is Phoenix's magnitude of operating leverage at sales of 280,000 units? (Round to two decimal points.)

Within the relevant range, the fixed cost per unit can be expected to decrease with increases in volume.

Assume that wages expense is a variable cost and that the relevant range is 10,000 to 15,000 labor hours. Within that range, the cost is $15 per hour. What can you assume about wages expense outside this range?

If revenues are expected to decline, management should attempt to convert its variable costs into fixed costs.

If a company had a pure fixed cost structure, what would be the relationship between a given dollar increase in sales and net income?

As activity increases, the fixed cost per unit increases while the variable cost per unit remains constant.

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:

The excess of revenue over variable costs is referred to as:

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:

A disadvantage of the high-low method is that the high point and low point may not be representative of the total data set available.

The total variable cost increases in direct proportion to volume.

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

Select the incorrect statement regarding the contribution margin income statement.