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
