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Exam 2: Cost Behavior, Operating Leverage, and Profitability Analysis

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Question 1

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Multiple regression analysis should be performed when a single independent variable influences multiple dependent variables.

A) True
B) False

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Question 2

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

A) 20%
B) 25%
C) 22%
D) 16.7%

E) C) and D)
F) B) and D)

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Question 3

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When using least-squares regression to determine variable and fixed costs, the r-square refers to the degree to which the change in the dependent variable can be explained by a change in the independent variable.

Fixed cost per unit:

Companies A and B are in the same industry and are identical except for cost structure. At a volume of 50,000 units, the companies have equal net incomes. At 60,000 units, Company A's net income would be substantially higher than B's. Based on this information,

How does total fixed cost behave when volume increases?

In the graph below, which depicts the relationship between units produced and unit cost, the dotted line depicts which type of cost per unit?

For the last two years BRC Company had net income as follows: $\begin{array}{l}\begin{array} { c | c } &2012 & 2013 \\\hline \text { Net Income }&\$ 160,000 & \$ 200,000\end{array}\end{array}$ Change 2012 to Year 1 and 2013 to Year 2 What was the percentage change in income from Year 1 to Year 2?

Potential problems associated with cost averaging can be reduced by averaging the cost over a shorter span of time.

For a mixed cost, total cost increases in direct proportion to volume.

The higher the magnitude of a company's operating leverage, the more benefit the company will receive from a given percentage increase in revenue.

How does variable cost per unit behave when volume decreases?

What is a primary disadvantage of the high-low method of analyzing a mixed cost?

What is the high-low method used for?

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

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

What advantages does the regression method of cost estimation offer, compared to the high-low and scattergraph methods of estimating mixed costs?

Describe the steps in the high-low method.

The following income statement is provided for Vargas, Inc. $\begin{array} { | l | r | } \hline \text { Sales reverue } ( 2,500 \text { urits } \mathrm { x } \$ 60 \text { per urit) } & \$ 150,000 \\\hline \text { Cost of goods sold (varable; } 2,500 \text { urits } \times \$ 20 \text { per urit) } & ( 50,000 ) \\\hline \text { Cost of goods sold (fived) } & ( 8,000 ) \\\hline \text { Gross margin } & 92,000 \\\hline \text { Admiristrative salaries } & ( 42,000 ) \\\hline \text { Depreciation } & ( 10,000 ) \\\hline \text { Supplies } ( 2500 \text { units } \times \$ 4 \text { per urit) } & ( 10,000 ) \\\hline \text { Net income } & \$ 30,000\\\hline\end{array}$ What is this company's magnitude of operating leverage?

In the graph below, which depicts the relationship between units produced and total cost, the dotted line depicts which type of total cost?