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

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Question 41

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The Varsity Club sells souvenir items at university sporting events for $24 each. The souvenir items cost $16 each. The club is negotiating with the university administration to sell the items in a kiosk in the university student center. Three rental arrangements are under consideration: Option 1: Pay rent of $2,000. Option 2: Pay rent of $1,200 plus 10% of revenue; and Option 3: Pay the university 25% of revenue; The club estimates that it will be able to sell 300 souvenir items during the period. Required: 1) Compute the break-even point in units for each of the three options. 2) Assuming the club reaches its sales target, which option should be chosen?

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1) Break-even points:
Option 1: ($24X - ...

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Question 42

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

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With a fixed cost structure, a...

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Question 43

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Cool Runnings operates a chain of frozen yogurt shops. The company pays $5,000 of rent expense per month for each shop. The managers of each shop are paid a salary of $3,000 per month and all other employees are paid on an hourly basis. Relative to the number of shops, the cost of rent is which kind of cost?

Cooper Company sells a product at $50 per unit that has unit variable costs of $20. The company's break-even sales volume is $150,000. How much profit will the company make if it sells 4,000 units?

Complete the following table to indicate your understanding of fixed and variable cost behavior by inserting one of the following responses in each box: "Remain constant," "Increase," or "Decrease." $\begin{array} { | l | l | l | } \hline & \begin{array} { l } \text { When Activity } \\\text { Increases }\end{array} & \begin{array} { l } \text { When Activity } \\\text { Decreases }\end{array} \\\hline \text { Unit fixed costs } & & \\\hline \text { Total fixed costs } & & \\\hline \text { Unit variable costs } & & \\\hline \text { Total variable costs } & & \\\hline\end{array}$

Taste of the Town, Inc. operates a gourmet sandwich shop. The company orders bread, cold cuts, and produce several times a week. If the cost of these items remains constant per customer served, the cost is said to be:

Carson Corporation's sales increase from $500,000 to $600,000 in the current year. What is the percentage change in sales?

Descriptions of cost behavior as fixed or variable pertain to a particular range of activity.

The following information is for a product manufactured and sold by Drake Company: Sales price per unit: $100 Variable cost per unit: $30 Total annual fixed costs: $350,000 Required: 1) Calculate the contribution margin per unit. 2) How many units must Crane sell to break-even? 3) How many units must Crane sell to achieve a profit of $35,000?

How would a company use target pricing to identify the desired cost for a product or service?

Mitchell Company sells its product for $100 per unit. The company's accountant provided the following cost information: $\begin{array} { | l | l | } \hline \text { Manufacturing costs } & \$ 25,000 + 45 \% \text { of sales } \\\hline \text { Selling costs } & \$ 15,000 + 20 \% \text { of sales } \\\hline \text { Administrative costs } & \$ 25,000 + 10 \% \text { of sales } \\\hline\end{array}$ What is the company's break-even point in units?

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?

Maryland Novelties Company produces and sells souvenir products. Monthly income statements for two activity levels are provided below: Required: 1) Identify the mixed expense(s). 2) Use the high-low method to separate the mixed costs into variable and fixed components. 3) Prepare a contribution margin income statement at the 20,000-unit level.

In 2013, Vanguard Company sold 80,000 of its only product at a selling price of $60 per unit. Variable costs were $18 per unit, and Vanguard's margin of safety for the year was 25,000 units. Required: 1. Calculate Vanguard's margin of safety ratio for 2013. 2. What was the amount of Vanguard's fixed costs for 2013?

The activity base selected determines whether a cost behaves as a variable cost or fixed cost.

All of the following would be considered a fixed cost for a bottled water company except:

Wu Company incurred $40,000 of fixed cost and $50,000 of variable cost when 4,000 units of product were made and sold. If the company's volume increases to 5,000 units, the company's total costs will be:

How does variable cost per unit behave when volume decreases?

Quick Change and Fast Change are competing oil change businesses. Both companies have 5,000 customers. The price of an oil change at both companies is $20. Quick Change pays its employees on a salary basis, and its salary expense is $40,000. Fast Change pays its employees $8 per customer served. Suppose Quick Change is able to lure 1,000 customers from Fast Change by lowering its price to $18 per vehicle. Thus, Quick Change will have 6,000 customers and Fast Change will have only 4,000 customers. Select the correct statement from the following.

Bates Company currently produces and sells 4,000 units of a product that has a contribution margin of $5 per unit. The company sells the product for a sales price of $20 per unit. Fixed costs are $20,000. The company has recently invested in new technology and expects the variable cost per unit to fall to $12 per unit. The investment is expected to increase fixed costs by $15,000. After the new investment is made, how many units must be sold to break-even?