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

How does fixed cost per unit behave when volume decreases?

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

Ruiz Company produces and sells a product that has variable costs of $50 and a selling price of $90. Its current sales total $270,000 per month. Fixed manufacturing costs total $40,000 per month and fixed selling and administrative costs total $35,000 per month. Required:Compute the company's current break-even point in units.Compute the company's current income and margin of safety in dollars.

Larimore Company sales are $560,000. The company has variable costs equal to 40% of sales and total fixed costs of $150,000.Required:What is the company's break-even point in sales dollars?Compute the company's operating leverage at its current sales level.Compute the percentage change in income that will accompany a 10% increase in sales.

Income statements for three companies are provided below: company A company B company C Sales (20 units) \ 1,000 \ 1,000 \ 1,000 Less variable costs 600 300 0 Less fixed costs 200 500 500 Jet income \ 200 \ 200 \ 200 Required:Prepare new income statements for the firms assuming each sells one additional unit (i.e. each firm sells 21 units)Briefly describe the effect of cost structure on profitability.

Explain how to calculate contribution margin per unit.

During the current year, Goldblum Company sold 160,000 units of its product at a selling price of $40. The variable cost per unit was $30, and Goldblum reported net income for the year of $220,000. What was the amount of Goldblum's fixed costs for the year?

How can contribution margin per unit be used to find the break-even point in units?

What is operating leverage, and how does a company achieve operating leverage?

Select the term from the list provided that best describes each of the following descriptions or definitions.

Houston Company produces a product that sells for $175 per unit and has variable costs of $50 per unit. Houston's annual fixed costs are $200,000, and the company wishes to earn a profit of $80,000. Required:Use the equation method to determine the sales volume in units and dollars required to earn the desired profit.

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

How does variable cost per unit behave when volume decreases?

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 $2,000Option 2: Pay rent of $1,200 plus 10% of revenueOption 3: Pay the university 25% of revenue The club estimates that it will be able to sell 300 souvenir items during the period. Required:Compute the break-even point in units for each of the three options.Assuming the club reaches its sales target, which option should be chosen?

Gamble Company has contribution margin of $20 per unit and a break-even point of 10,000 units. If Gamble sells 9,999 units, what would be its net income or loss? Explain how you calculated your answer.

What does the margin of safety measure?

How is operating leverage related to cost structure?

Cannon Company operates a clothing store that reported the following operating results for the current year: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Income statement }$ Sales revenue \ 2,000,000 Cost of goods sold Gross margin \ 800,000 Employee commissions and bonuses ( 5\% of sales) (100,000) Depreciation expense (150,000) Salaries expense (260,000) Shipping and delivery expense ( 2 \% of sales) (40,000) Advertising expense Net income Required: Prepare an income statement for Cannon Company using the contribution margin format.

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." When Activity When Activity Increases Decreases Unit fixed costs Total fixed costs Unit variable costs Total variable costs

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: Number ot Units 200,000 250,000 300,000 Total costs Fixed \ 15,000,000 Variable 24,000,000 Total costs \ 39,000,000 Cost per Unit Fixed \7 5 Variable 120 Total cost ner unit \1 95 Required: Complete the preceding table by filling the missing amounts for 250,000 and 300,000 units.Assume that Phoenix actually makes 280,000 units. What would be the total costs and the cost per unit at this level of activity? (Round the cost per unit to two decimal points)If Phoenix sells each unit for $220, what is Phoenix's magnitude of operating leverage at sales of 280,000 units? (Round to two decimal points.)