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

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Question 91

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Why would a company need to estimate the fixed and variable components of a mixed cost?

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For many managerial decisions, a company...

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Question 92

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

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Question 93

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One reason for computing the average cost for a product rather than the actual cost is that average cost is easier to compute.

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 statements are provided for two companies operating in the same industry $\begin{array} { l }& \text {Felix Company }& \text { Jinx Company} \\ \text { Revenue}&\$200,000&\$200,000\\ \text { Variable costs}&(25,000) &(70,000) \\ \text {Contribution margin }&175,000&130,000\\ \text {Fixed costs }&(70,000) &(25,000) \\ \text {Net income }&\$105,000&\$105,000\end{array}$ Assuming sales increase by $1,000, select the correct statement from the following:

For the last two years BRC Company had net income as follows: $\begin{array} { l }&2012&2013\\ \text {net income } &\$160,000&\$200,000\\\end{array}$ What was the percentage change in income from 2012 to 2013?

What is meant by the phrase, "relevant range?" How does the concept of relevant range affect fixed costs?

A company with a completely fixed cost structure will have operating leverage of 1.

Pickard Company pays its sales staff a base salary of $4,500 a month plus a $3.00 commission for each product sold. If a salesperson sells 800 units of product in January, the employee would be paid:

The contribution margin format income statement is not widely used for external financial reporting, but is allowed by GAAP.

The following information is for a product of Lanier Company: Last year, the variable cost per unit was $25. Total fixed costs were $800,000. At a volume of 170,000 units, the company achieved a profit of $50,000. Required: What was the unit sales price for the product last year?

A margin of safety of 30% means that every dollar in revenue generates thirty cents in profit.

Grant Company and Lee Company compete in the same market. The following budgeted income statements illustrate their cost structures. $\begin{array}{|c|c|c|}\hline & \text { Grant Company } & \text { Lee Company } \\\hline \text { Number of customers } & 200 & 200 \\\hline \text { Sales revenue }(200 \times \$ 150) & \$30,000 & \$30,000 \\\hline \text { Less variable costs } & \underline{6,000} & \underline{18,000} \\\hline \text { Contribution margin } & \$24,000 & \$12,000 \\\hline \text { Less fixed costs } & \underline{19,000} & \underline{7,000} \\\hline \text { Net income } & \$5000 & \$5000 \\\hline\end{array}$ Required: (a) If Grant Company lowers its price to $135, it will lure 80 customers away from Lee Company. Prepare Grant's income statement based on 280 customers. (b) If Lee Company lowers its price to $135 (assuming that Grant Company is still charging $150 per customer), Lee would lure 80 customers away from Grant. Prepare Lee's income statement based on 280 customers. (c) Which of the companies would benefit more from lowering its sales price to attract more customers, and why?

Pierce Company's break-even point is 12,000 units. Its product sells for $25 and has a $10 variable cost per unit. What is the company's total fixed cost amount?

The following income statement is provided for Grant, Inc. $\begin{array}{|l|r|}\hline\text { Sales revenue (1,500@ } \$ 30 \text { per unit) } &\$ 45,000 \\\hline \text { Variable costs }(1,500 @ \$ 14 \text { per unit) } & 21,000 \\\hline \text { Fixed costs } & 16,000 \\\hline \text { Net income } & \$ 8,000\\\hline\end{array}$ What is this company's magnitude of operating leverage?

A low magnitude of operating leverage is best for most companies.

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 following information is for Gable, Inc. and Harlowe, Inc. for the recent year. What total amount of net income will Harlowe, Inc. earn if it experiences a 10 percent increase in revenue?

If a company had a pure variable cost structure, what would be the relationship between contribution margin and net income, and what would be the magnitude of operating leverage?

If a company has both fixed and variable costs, their operating leverage will always be greater than 1.