MOL Concepts
Operating Leverage states that a change in revenue creates a disproportionate change in
net income
Green Company has Sales Revenue of $99,000 and Variable Costs of $44,000. If Net Income is $16,000, what is the Magnitude of Operating Leverage?
$2.75
Month Machine Hours Maintenance Cost
January 22,750 $55,750
February 19,000 $57,000
March 28,500 $74,750
April 32,500 $84,000
May 29,000 $78,500
June 34,000 $93,000
July 30,000 $80,250
What two months (four values) from this table would be used in the high-low method?
June : 34,000 hours & $93,000
February: 19,000 hours & $57,000
Purple Company sells 5,000 units with a fixed cost of $22,000 and a variable cost per unit of $6. Purple plans to sell at $10 per unit. What is the break-even point in units using the contribution margin per unit method?
5,500 units
Costs that can be traced to objects in a cost-effective manner are called
Direct Costs
The ______ the MOL, the more sensitive Net Income is to a change in revenue
higher
Red Company sold 9,500 units in the past year. This resulted in sales revenue of $175,000, fixed costs of $48,000, and the variable cost per unit was $10. What is the Magnitude of Operating Leverage?
$2.50
What is the formula for Estimated Variable Cost Per Unit using the High-Low Method?
Change in Dollars / Change in Quantity
Purple Company sells 5,000 units with a fixed cost of $22,000 and a variable cost per unit of $6. Purple plans to sell at $10 per unit. What is the break-even point in dollars using the contribution margin ratio method?
$55,000
The process of assigning a cost to two or more designated cost objects is
cost allocation
What type of cost is necessary for Operating Leverage?
Fixed Cost
Orange Company sold 10,000 units in the past year. This resulted in sales revenue of $150,000, fixed costs of $42,500, and the variable cost per unit was $7. What is the Magnitude of Operating Leverage?
$2.13
Month Machine Hours Maintenance Cost
January 22,750 $55,750
February 19,000 $57,000
March 28,500 $74,750
April 32,500 $84,000
May 29,000 $78,500
June 34,000 $93,000
July 30,000 $80,250
Use the high-low method to determine the estimated variable cost per unit.
$2.40 per unit
Green company sells units at a price of $410 per unit with a variable cost of $245 per unit. Fixed costs are estimated to be $13,200. What is the break-even point in units using the Equation Method?
80 units
There are three possible Cost Objects: Individual Products, Divisions, and the Company.
If the Cost Object is the Individual Products, would Supplies used by Division C be a direct or indirect cost?
Indirect
At a sales level of $325,000, the magnitude of operating leverage for the Cake Factory is 2.4. If sales increase by 20%, profits will increase by _______ %
48%
Orange Company sells chairs at a selling price of $60 per unit. The variable cost per unit is $35, and the company’s total fixed costs are $150,000 per year. During the year, the company sold 9,000 units.
What is the Margin of Safety in Units?
3,000 units
Month Machine Hours Maintenance Cost
January 22,750 $55,750
February 19,000 $57,000
March 28,500 $74,750
April 32,500 $84,000
May 29,000 $78,500
June 34,000 $93,000
July 30,000 $80,250
Use the high-low method to determine the estimated total fixed cost
$11,400
Gold Company sells 5,000 units at $75 per unit with variable costs of $35 per unit. Estimated fixed costs are $38,000. If Gold Company has a desired profit of $45,000, what is the sales volume necessary to reach the desired profit?
2,075 units
ABC Company has 100 employees, 65 are in Department Yellow and 35 in Department Gray. ABC incurred $320,000
in fringe benefits costs last year. How much in fringe benefit costs should be allocated to Department Yellow?
$208,000
If fixed costs increased, the Magnitude of Operating Leverage would
Increase
Orange Company sells chairs at a selling price of $60 per unit. The variable cost per unit is $35, and the company’s total fixed costs are $150,000 per year. During the year, the company sold 9,000 units.
What is the Margin of Safety as a Percentage?
33.33%
Month Machine Hours Maintenance Cost
January 22,750 $55,750
February 19,000 $57,000
March 28,500 $74,750
April 32,500 $84,000
May 29,000 $78,500
June 34,000 $93,000
July 30,000 $80,250
Use the results of the high-low method to estimate machine maintenance cost for ----- hours
$78,600
Gold Company sells 5,000 units at $75 per unit with variable costs of $35 per unit. Estimated fixed costs are $38,000. If Gold Company has a desired profit of $45,000, what is the amount of sales dollars necessary to reach the desired profit?
$155,625
Employees of XYZ Company, worked 4,900 direct labor hours in January and 3,400 direct labor hours in February.
XYZ expects to use 50,000 direct labor hours during the year, and expects to incur $70,000 of workers compensation insurance cost for the year.
How much insurance premium should be allocated to products made in January and February?
January: $6,860
February: $4,760