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

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Question 61

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Potential problems associated with cost averaging can be reduced by averaging the cost over a shorter span of time.

A) True
B) False

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Question 62

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Contribution margin represents the amount available to cover fixed expenses and then provide company profits.

A) True
B) False

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Question 63

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

M and M, Inc. produces a product that has a variable cost of $3.00 per unit. The company's fixed costs are $30,000. The product is sold for $5.00 per unit and the company desires to earn a target profit of $20,000. What is the amount of sales that will be necessary to earn the desired profit?

Goff Corporation sells products for $75 each that have variable costs of $50 per unit. Goff's fixed cost is $350,000. Required: Calculate the contribution margin per unit, then use the per unit contribution margin approach to find the break-even point in units and dollars.

Select the incorrect statement regarding fixed and variable costs.

Describe the format of an income statement prepared using the contribution margin approach.

The following information is provided for Southall Company: $\begin{array}{|l|r|}\hline \text { Sales revenue } & \$ 125,000 \\\hline \text { Variable manufacturing costs } & 42,500 \\\hline \text { Fixed manufacturing costs } & 37,500 \\\hline \text { Variable selling and administrative costs } & 15,000 \\\hline \text { Fixed selling and administrative costs } & 12,500\\\hline\end{array}$ What is this company's contribution margin?

Costs that might be incurred by service, merchandising, and manufacturing companies are described below: Sales commissions paid to sales associates in a department store Shipping cost for Amazon Electricity cost to heat and light a law firm Rent on a storeroom used by Turf Pros to store lawn equipment Salary of a supervisor in a Best Buy distribution center Wages paid to production workers in a General Motors plant Insurance on a Hershey factory Fuel costs for Southwest Airlines Depreciation of office equipment by Microsoft Corporation Dishwashing in an Olive Garden restaurant Salary of the CEO of Microsoft Lubricants used to maintain machinery in a textile factory Cost of metal cans used in a dog food factory Cost of pizza boxes for Domino's Pizza Material handling costs for Frito Lay Required: Classify each cost as variable (V) or fixed (F) with respect to volume or level of activity.

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

At its $60 selling price, Atlantic Company has sales of $15,000, variable manufacturing costs of $4,000, fixed manufacturing costs of $1,000, variable selling and administrative costs of $2,000 and fixed selling and administrative costs of $1,000. What is the company's contribution margin per unit?

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

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, select the incorrect statement:

Former NFL coach Joe Gibbs is highly sought after as a guest speaker. His fee can run as high as $150,000 for a single two-hour appearance. Recently, he was asked to speak at a seminar offered by the National Sports in Education Foundation (NSEF). Due to the charitable nature of the organization, Mr. Gibbs offered to speak for $100,000. NSEF planned to invite 350 guests who would each make a $500 contribution to the organization. The Foundation's executive director was concerned about committing so much of the organization's cash to this one event. So instead of the $100,000 fee she countered with an offer to pay Mr. Gibbs 50% of the revenue received from the seminar and no other payments. Required: (a) Classify the two offers in terms of cost behavior (fixed vs. variable). Scenario A, NSEF pays Gibbs a $100,000 fee: Scenario B, NSEF pays Gibbs 50% of revenue: (b) Compute the budgeted income (assuming there are no other expenses) under each of the following scenarios: 1) NSEF agrees to pay the $100,000 fee, and 350 guests actually attend the seminar; and 2) NSEF pays Mr. Gibbs 50% of revenue, and 350 guests attend the seminar. (c) For each scenario ($100,000 fee vs. 50% of revenue), compute the percentage increase in profit that would result if the Foundation is able to increase attendance by 20 percent over the original plan (to a total of 420). (d) For each scenario, compute NSEF's cost per contributor if 350 attend and if 420 contributors attend. (e) Summarize the impact on risk and profits of shifting the cost structure from fixed to variable costs.

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:

Operating leverage enables a company to convert small changes in fixed costs into dramatic changes in profitability.

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?

Select the incorrect statement regarding the contribution margin income statement.

Which of the following statements regarding Company A is incorrect?

What is the break-even point for a company?