Cost Classifications
What are the 3 types of costs?
Fixed, Variable, Mixed
What is the break even point?
The point at which a companie's total revenues equal total costs (both variable and fixed costs)
Total revenues = total costs
True or false: Operating leverage refers to how a company's net income reacts to changes in variable costs
False
Operating leverage refers to how a company's net income changes in sales revenue.
What is the formula to determine the variable cost per unit under the high low method?
(High cost - Low cost) / (High Activity - Low Activity) = Variable Cost Per Unit
What does the contribution margin need to cover to not have a negative net income?
Fixed costs and target net income
What is the effect of variable costs and fixed costs in total and per unit?
Variable costs: Varies in total directly and proportionately in the activity level, cost remains the same per unit
Fixed Costs: Remain the same in total regardless of activity level, unit fixed costs vary inversely with activity
At the break-even point of 2,000 units, variable costs are $165,000, and fixed costs are $96,000. What is the unit selling price?
$130.50
True or false: Lower operating leverage exposes a company to greater earnings and greater risk
False: Higher operating leverage exposes a company to greater earnings and greater risk
What is the formula to determine Total Fixed Costs under the High Low Method?
Total Costs - Total Variable Costs = Total Fixed Costs
OR
Total costs - Unit Variable Costs X Activity Level = Total Fixed costs
Sundancer's CVP income statement included sales of 6,000 units, unit selling price of $150, unit variable cost of $100, and fixed expenses of $150,000. Contribution margin is
$300,000
(150-100)*6,000 units
Purple company reports total rent costs at two levels of production. Classify the rent cost as variable, fixed, or mixed.
10,000 units: $8,000
20,000 Units: $8,000
Rent is a fixed cost
Fixed costs are $900,000 and the unit variable costs are 75% of the unit selling price. What is the break-even point in sales dollars?
$3,600,000
True or False: The lower the break-even point, the less sensitive a company's net income is to changes in sales revenue
True : When a company relies more heavily on fixed costs, it makes the net income more sensitive to chnages in sales revenue. The opposite is true when ta company relies less on fixed costs.
What method is better and why? The high low method or regression analysis?
The regression analysis method is more accurate because it takes into consideration all the data points when determining the relationship. The high low method is simple but the results are inconsistant because it only considers two data points and makes an assumption about the relationship based on them.
For Randall Co., at a sales volume of 4,000 units, sales revenue is $75,000, variable costs total $50,000, and fixed expenses are $21,000. What is the unit contribution margin?
$6.25
(75,000-50,000)/4,000 units
Green company reports total labor costs at two levels of production. Classify the labor cost as variable, fixed, or mixed.
10,000 units: $17,000
20,000 Units: $34,000
Labor is a variable cost
Blue company is planning to sell 300,000 cups at $7 per unit. The contribution margin ratio is 40%. If Blue company will break even at this level of sales, what are the fixed costs?
$840,000
If a company was to acquire more sophisticated equipment to reduce thier use of of manual labor, how would this affect the companies operating leverage? What if the company was to outsource more, how would this affect the companies operating leverage?
More equipment: Increases fixed costs which increases operating leverage
More outsourcing:Decreases fixed costs which decreases operating leverage
Assume that Orange company has the maintenance costs and mileage data over a 4 month period. What is the unit variable cost?
January: 30,000 miles driven / $112,000 total costs
February: 50,000 miles driven / $130,000 total costs
March: 15,000 miles driven / $83,000 total costs
April: 70,000 miles driven / $154,000 total costs
$1.29 variable cost per unit
(154,000-83,000)/(70,000-15,000)
Hinge Manufacturing's cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company’s sales revenue is $1,580,000, what is its contribution margin?
$860,000
(1,580,000-420,000-300,000)
Purple company reports total utilities costs at two levels of production. Classify the utility cost as variable, fixed, or mixed.
10,000 units: $3,000
20,000 Units: $5,000
Utilities are a mixed cost
Pink company's contribution margin ratio is 25%. If Pink company's sales revenue is $200 greater than its break-even sales dollars, what will the net income be?
$50
Sundancer Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000. Sundancer degree of operating leverage is
4.00
(Contribution margin / Net income)
Assume that Orange company has the maintenance costs and mileage data over a 4 month period. What is the total fixed costs?
January: 30,000 miles driven / $112,000 total costs
February: 50,000 miles driven / $130,000 total costs
March: 15,000 miles driven / $83,000 total costs
April: 70,000 miles driven / $154,000 total costs
$63,636.36 fixed costs
Green company makes travel bags that sell for $40 each. Management expects fixed costs to total $760,000 and variable costs to be $30 per unit.
What is the contribution margin ratio?
What is the margin of safety if actual sales are $3,500,000?
CMR: 25% ((40-30)/40)
Margin of safety: $460,000 (3,500,000-3,040,000)