SAU Accounting II Ch 2

Mark Company, Inc. sells electronics. The company generated sales of $45,000. Contribution margin is $20,000 and net income is $4,000. Based on this information, the magnitude of operating leverage is: Select one: A. 6.25 B. 5.00 C. 2.25 D. 11.25

B. 5.00 Magnitude of operating leverage = Contribution margin ÷ Net incomeMagnitude of operating leverage = $20,000 ÷ $4,000 = 5.0

Which of the following equations can be used to compute a firm's magnitude of operating leverage? Select one: A. Net income ÷ sales B. Contribution margin ÷ net income ion margin D. Net income ÷ contribution margin

B. Contribution margin ÷ net income Magnitude of operating leverage = Contribution margin ÷ Net income

Select the correct statement from the following. Select one: A. A fixed cost structure offers greater risk but higher opportunity for profitability than does a variable cost structure. B. A fixed cost structure offers less risk (i.e., less earnings volatility) and higher opportunity for profitability than does a variable cost structure. C. A variable cost structure offers greater risk but higher opportunity for profitability than does a fixed cost structure. D. A variable cost structure offers less risk and higher opportunity for profitability than does a fixed cost structure.

A. A fixed cost structure offers greater risk but higher opportunity for profitability than does a variable cost structure. Shifting the cost structure from fixed to variable reduces not only the level of risk but also the potential for profits.

Rock Creek Bottling Company pays its production manager a salary of $6,000 per month. Salespersons are paid strictly on commission, at $1.50 for each case of product sold.For Rock Creek Bottling Company, the cost of the salespersons' commissions is an example of: Select one: A. a variable cost. B. a fixed cost. C. a mixed cost. D. None of these

A. a variable cost.

The manager of Kenton Company stated that 45% of its total costs were fixed. The manager was describing the company's: Select one: A. cost averaging. B. contribution margin. C. cost structure. D. operating leverage.

C. cost structure.

Operating leverage exists when: Select one: A. the organization makes purchases on credit instead of paying cash. B. management buys enough of the company's shares of stock to take control of the corporation. C. small percentage changes in revenue produce large percentage changes in profit. D. a company utilizes debt to finance its assets.

C. small percentage changes in revenue produce large percentage changes in profit. Operating leverage is the cost structure condition that produces a proportionately larger percentage change in net income for a given percentage change in revenue. Business managers apply operating leverage to magnify small changes in revenue into dramatic changes in profitability.

Select the correct statement regarding fixed costs. Select one: A. Total fixed cost remains constant when volume changes. B. There is a contradiction between the term "fixed cost per unit" and the behavior pattern implied by the term. C. Fixed cost per unit is not fixed. D. All of these are correct statements.

D. All of these are correct statements. The total amount of a fixed cost does not change when volume changes. In contrast, fixed cost per unit is not fixed. It changes as the volume changes. The fixed cost per unit decreases when volume increases and the fixed cost per unit increases when volume decreases.

Select the correct statement regarding fixed costs. Select one: A. The fixed cost per unit does not change when volume decreases. B. The fixed cost per unit increases when volume increases. C. Because they do not change, fixed costs should be ignored in decision making. D. The fixed cost per unit decreases when volume increases.

D. The fixed cost per unit decreases when volume increases. The total amount of a fixed cost does not change when volume changes. In contrast, fixed cost per unit is not fixed. It changes as the volume changes. The fixed cost per unit decreases when volume increases and the fixed cost per unit increases when volume decreases.

The BRC Company is considering the introduction of a new line of high end electronics. Because there is considerable uncertainty with regard to the demand for the products, the company would probably be served better by a variable cost structure. Select one: True False

True

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

True