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Exam 5: Cost Behavior and Cost-Volume-Profit Analysis

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Question 21

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What is operating leverage? How can the degree of operating leverage be used in analyzing changes in sales?

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Operating leverage is the extent or rela...

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Question 22

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Shown below are terms or phrases preceded by letters a through j followed by a list of definitions.Match the terms or phrases 1 through 10 with the correct definitions by placing the letter of the term or phrase in the answer space provided at the beginning of each definition.

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Responses

A cost that changes in proportion to changes in volume of activity.

Estimated line of cost behavior

A line drawn on a graph to fit the past relation between cost and sales.

Relevant range of operations

A cost that changes with volume but not at a constant rate.

Mixed cost

A statistical method for deriving an estimated line of cost behavior that is more precise than the high-low method and a scatter diagram.

Cost-volume-profit analysis

A cost that includes both fixed and variable costs.

Fixed cost

A cost that remains unchanged in total amount even when the volume of activity varies.

Step-wise cost

A cost that remains constant over limited ranges of volumes of activity but changes by a lump sum when volume changes occur outside these limited ranges.

Least-squares regression

Useful in business planning; includes predicting the volume of activity, the costs incurred, sales earned, and profits received.

Curvilinear cost

A company's normal operating range; excludes extremely high and low volumes that are not likely to be encountered.

Variable cost

The amount that the sale of one unit contributes toward recovering fixed costs and earning profit.

Contribution margin per unit

Premises

A cost that changes in proportion to changes in volume of activity.

A line drawn on a graph to fit the past relation between cost and sales.

A cost that changes with volume but not at a constant rate.

A statistical method for deriving an estimated line of cost behavior that is more precise than the high-low method and a scatter diagram.

A cost that includes both fixed and variable costs.

A cost that remains unchanged in total amount even when the volume of activity varies.

A cost that remains constant over limited ranges of volumes of activity but changes by a lump sum when volume changes occur outside these limited ranges.

Useful in business planning; includes predicting the volume of activity, the costs incurred, sales earned, and profits received.

A company's normal operating range; excludes extremely high and low volumes that are not likely to be encountered.

The amount that the sale of one unit contributes toward recovering fixed costs and earning profit.

Responses

Estimated line of cost behavior

Relevant range of operations

Mixed cost

Cost-volume-profit analysis

Fixed cost

Step-wise cost

Least-squares regression

Curvilinear cost

Variable cost

Contribution margin per unit

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Correct Answer

Premises

Responses

A cost that changes in proportion to changes in volume of activity.

A line drawn on a graph to fit the past relation between cost and sales.

A cost that changes with volume but not at a constant rate.

A statistical method for deriving an estimated line of cost behavior that is more precise than the high-low method and a scatter diagram.

A cost that includes both fixed and variable costs.

A cost that remains unchanged in total amount even when the volume of activity varies.

A cost that remains constant over limited ranges of volumes of activity but changes by a lump sum when volume changes occur outside these limited ranges.

Useful in business planning; includes predicting the volume of activity, the costs incurred, sales earned, and profits received.

A company's normal operating range; excludes extremely high and low volumes that are not likely to be encountered.

The amount that the sale of one unit contributes toward recovering fixed costs and earning profit.

Premises

A cost that changes in proportion to changes in volume of activity.

A line drawn on a graph to fit the past relation between cost and sales.

A cost that changes with volume but not at a constant rate.

A statistical method for deriving an estimated line of cost behavior that is more precise than the high-low method and a scatter diagram.

A cost that includes both fixed and variable costs.

A cost that remains unchanged in total amount even when the volume of activity varies.

A cost that remains constant over limited ranges of volumes of activity but changes by a lump sum when volume changes occur outside these limited ranges.

Useful in business planning; includes predicting the volume of activity, the costs incurred, sales earned, and profits received.

A company's normal operating range; excludes extremely high and low volumes that are not likely to be encountered.

The amount that the sale of one unit contributes toward recovering fixed costs and earning profit.

Responses

Question 23

Short Answer

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A_______________ cost is one that remains unchanged in amount when volume of activity varies from period to period within a relevant range.A ______________ cost is one that changes in proportion to changes in volume of activity.

The Haskins Company manufactures and sells radios.Each radio sells for $23.75 and the variable cost per unit is $16.25.Haskin's total fixed costs are $25,000, and budgeted sales are 8,000 units.What is the contribution margin per unit?

Benny and Frieda are art students who often received compliments on the t-shirts they designed and made themselves.In need of funds for fall semester, they decide to sell these t-shirts at a small stand at the South Haven Beach during the summer.Rent on the beach stand is $1,600 per month.Variable costs per t-shirt are $4.75. a.Complete the following table which estimates total costs and cost per t-shirt at the indicated levels of activity for this t-shirt stand.Round the costs per t-shirt to two decimal places. $\begin{array}{c}\quad\quad\quad\quad\quad\quad\quad\quad \text { Number of t-shirts sold in one month }\\\begin{array} { | l | c | c | c | } \hline\quad\quad & 1,000 & 1,500 & 2,000 \\\hline \text { Total fixed cost } \quad\quad\quad\quad\quad\quad& & & \\\hline \text { Total variable cost } & & & \\\hline \text { Total cost } & & & \\\hline \text { Cost per t-shirt sold } & & & \\\hline\end{array}\end{array}$ b.Benny and Frieda need to each earn $5,000 before the fall term starts.They plan to sell the t-shirts for $15. 1.Will they be able to meet their goal? Support your comments with computations. 2.What other factors might affect this business venture?

An important assumption in the analysis of a multiproduct situation is that the sales mix is known and remains constant.

A term describing a firm's normal range of operating activities is:

Legacy Company is considering the production and sale of a new product with the following sales and cost data: unit sales price $18; unit variable costs $8.10; and total fixed costs of $8,250.Legacy is subject to a 25% tax rate.Determine the dollar sales needed to generate an after-tax income of $33,000.

Assume Moe's Southwest Grill has a break-even point of 24,000 units.At this point, total sales are $1,800,000 and total variable costs are $1,200,000.Compute total fixed costs at the break-even point.

Camden Corporation sells three products (M, N, and O) in the following mix: 3:1:2.Unit price and cost data are: $\begin{array}{lccc}& \underline{\text { M }} & \underline{\text {N }} & \underline{\text { O }} \\\text { Unit sales price } &\$ 7 & \$ 4 & \$ 6\\\text { Unit variable costs } &3&2&3\\\end{array}$ Total fixed costs are $340,000.The break-even point in sales dollars for the current sales mix is:

What are the contribution margin and net income under the current conditions?

What-if analysis of cost, revenue, and volume changes is called _______________________.Further analysis of this nature may be achieved by measuring the degree of ______________________.

What is the high-low method? Briefly describe how it is applied.

Define variable cost, fixed cost, and mixed cost.

If a firm's forecasted sales are $250,000 and its break-even sales are $190,000, the margin of safety (in dollars) is:

__________________ is the amount by which the unit selling price of a product exceeds its per unit variable cost.

The contribution margin per unit is the price at which a unit must be sold in order for the company to break even.

The excess of expected sales over the sales level at the break-even point is known as the:

A method that estimates cost behavior by connecting the costs linked to the highest and lowest volume levels on a scatter diagram with a straight line is called the:

Kelley Company and Mason Company each have sales of $200,000 and costs of $140,000.Kelley Company's costs consist of $40,000 fixed and $100,000 variable, while Mason Company's costs consist of $100,000 fixed and $40,000 variable.Which company will suffer the greatest decline in profits if sales volume declines by 15%?