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

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Question 1

True/False

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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 2

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Martin Company currently produces and sells 40,000 units of product at a selling price of $12. The product has variable costs of $6 per unit and fixed costs of $150,000. The company currently earns a total contribution margin of:

A) $280,000
B) $200,000
C) $240,000
D) $90,000

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

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Question 3

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How does total fixed cost behave when volume increases?

The following information is for Gable, Inc. and Harlowe, Inc. for the recent year. Based on the above data, which company has a higher operating leverage?

Select from the following the incorrect statement regarding contribution margin.

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

Zeus, Inc. produces a product that has a variable cost of $9.50 per unit. The company's fixed costs are $40,000. The product sells for $12.00 a unit and the company desires to earn a $20,000 profit. What is the volume of sales in units required to achieve the target profit? (Do not round intermediate calculations.)

Explain how to calculate contribution margin per unit.

Which characteristic is true of the scatter graph method, high-low method, and regression analysis?

Which of the following costs typically include both fixed and variable components?

For a company using target costing, market price minus profit equals target price.

Select the incorrect statement regarding the relationship between cost behavior and profits.

The following income statement is provided for Vargas, Inc. \begin{array} { l l } \text {Sales revenue ( 2,500 units \mathrm{x} \$ 60 per unit) } &\$150,000\\ \text {Cost of goods sold (varable; 2,500 units \( \mathrm{x} \$ 20 \) per unit) } &50,000\\ \text { Cost of goods sold (fixed) } &8,000\\ \text { Gross margin} &92,0000\\ \text { Administrative salaries} &42,000\\ \text {Depreciation } &10,000\\ \text {Supplies (2,500 units x \$4 per unit) } &10,000\\ \text { Net income} &\$30,000\\\end{array} What is this company's magnitude of operating leverage?

What is the high-low method used for?

Based on the income statements shown below, which division has the cost structure with the highest operating leverage? $\begin{array} { | l | c | c | c | } \hline & \text { Soft Drinks } & \text { Bottled Water } & \text { Fruit Juices } \\\hline \text { Revenue } & \$ 50,000 & \$ 50,000 & \$ 50,000 \\\hline \text { Variable costs } & ( 10,000 ) & ( 5000 ) & ( 30,000 ) \\\hline \text { Contribution margin } & 40,000 & 45,000 & 20,000 \\\hline \text { Fixed costs } & ( 30,000 ) & ( 40,000 ) & ( 10,000 ) \\\hline \text { Net income } & \$ 10,000 & \$ 5,000 & \$ 10,000 \\\hline\end{array}$

Assume that Microsoft and Sony both plan to introduce a new hand-held video game. Microsoft plans to use a heavily automated production process to produce its product while Sony plans to use a labor-intensive production process. The following revenue and cost relationships are provided: Required: (a) Compute the contribution margin per unit for each company. (b) Prepare a contribution income statement for each company assuming each company sells 8,000 units. (c) Compute each firm's net income if the number of units sold increases by 10%. (d) Which firm will have more stable profits when sales change? Why?

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

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:

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: $\begin{array}{|l|r|r|r|}\hline \text { Number of Units } & 200,000 & 250,000 & 300,000 \\\hline \text { Total costs } & & & \\\hline \text { Fixed } & \$15,000,000 & & \\\hline \text { Variable } & 24,000,000 & & \\\hline \text { Total costs } & \$39,000,000 & \\\hline & & & \\\hline \text { Cost per Unit } \\\hline \text { Fixed } & \$75 \\\hline \text { Variable } & 120 \\\hline \text { Total cost per unit } & \$195 \\\hline\end{array}$ 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? 3) If Phoenix sells each unit for $220, what is Phoenix's magnitude of operating leverage at sales of 280,000 units?

Describe the steps in the high-low method.