Accounting Chapter 5 Exam

A company has a contribution margin ratio of 40%. The president believes that spending $1,500 to advertise its product will increase sales by $10,000. How much will net income increase if the president is correct?

$2500 Reason: $10000x40%-$1500 increase.

Given: Calculated variable cost per unit of $1.40 High level of activity: 2,500 units and $5,300 total cost The low level of activity was 1,000 units. Total cost at the low level of activity equals ______.

$3,200 Rationale:$5,300 - ($1.40 x 2,500) = $1,800 of fixed costs. $1,800 + (1,000 x $1.40) = $3,200 of total cost at the low level of activity.

Why is it important to analyze mixed costs?

- To make decisions, managers need to know how costs change. - Managers need to know how much of a cost is variable and how much is fixed.

Which of the following statements are true?

a) Mixed costs are also commonly known as step-fixed or step-variable costs. =b) The equation for a straight line can be used to express the relationship between mixed costs and the level of activity. =c) Mixed costs contain both fixed and variable cost elements. =d) Both the total cost and the per-unit cost of mixed costs change with changes in the level of activity.

When using the high-low method, if the high or low levels of cost do not match the high or low levels of activity, choose the periods with the highest and lowest ______.

activity

How total costs changes as some level of activity changes is called cost

behavior

Mixed costs ______.

change both in total and per unit as activity changes

When using the high-low method, if the high or low levels of cost do not match the high or low levels of activity, ______.

choose the periods with the highest and lowest levels of activity and their associated costs

A fixed cost, such as a long-term lease, that is difficult for a manager to change in the short-run is called a(n)

comitted

A statistical technique for finding the best fitting line based on historical data is ______.

least squares regression

The assumption that the relationship between total cost and activity can be approximated by a straight line is called the ____ assumption.

linearity

Cost assumptions are reasonably valid within the ________ _______ of activity.

relevant range

The unit contribution margin ______.

tells how much each additional unit contributes to profit

A simple approach that uses the two most extreme activity observations is ______.

the high-low method

When using the high low method, the difference in cost divided by the difference in activity is ______.

the variable cost per unit

True or false: Presenting fixed costs on an average per unit basis makes them look like they are variable costs.

true

True or false: The key to most managerial decision is understanding cost behavior.

true

The high-low method ______.

- calculates the line based on the most extreme activity data points - provides a reasonable estimate as long as the data points are within the relevant range - only uses two data points

In the equation Y = a + bX, b denotes the ______.

- slope of the line - variable cost per unit of activity

Variable costs ______.

remain constant per unit and vary in total

The high-low method ______.

- is easy to apply - may produce inaccurate results

The financial statement that organizes costs by their behavior instead of by their function is the ______.

contribution format income statement

After fixed costs have been covered, ____ ____ becomes net operating income.

contribution margin

Sales revenue minus variable costs equals

contribution margin

A fixed cost remains fixed ______ within the relevant range of activity.

in total

Variable costs vary ______ within the relevant range of activity.

in total

Which of the following is not a method used to estimate the fixed and variable portions of mixed costs?

relevant range analysis

Within the relevant range of activity, variable costs ______.

remain constant per unit vary in total

A limitation of ______ is that it is (they are) subjective and inexact.

scattergraphs

When using the high-low method, the slope of the line equals the ____ cost per unit of activity.

variable

Within the relevant range, ____ costs remain constant on a per unit basis.

variable

Within the relevant range, costs remain constant on a per unit basis. (Enter only one word per blank.)

variable

The high-low method may provide a reasonable estimate of fixed and variable costs as long as the high and low data points fall ______ the relevant range.

within

A visual representation of the relationship between cost and activity is provided by a(n)

scatterplot

True or false: When using the high-low method, fixed costs are calculated after variable costs are determined.

true

Contribution margin ratio is ______.

unit contribution margin/unit sales price

A cost that changes in direct proportion to changes in the activity level is a ______ cost.

variable