REVIEW Chapter 2 HW 1. Shifting your cost structure from fixed to variable cost a. Reduces risk by limiting operating leverage 2. Earning fluctuations are more likely if a. Fixed costs are high 3. If a change in volume affects the total cost, the cost is defined as a(n) ___ cost. a. Variable 4. Changing the activity base: a. Can change a fixed cost to a variable cost b. Can change a variable cost to a fixed cost 5. True or false? Variable cost increases risk by decreasing operating leverage. a. False i. Variable cost reduces risk by decreasing operating leverage. 6. A cost Is defined as fixed or variable based on the ___ base used. a. Activity 7. What happens if the activity level changes? a. Total variable cost changes b. Variable cost per unit remains constant 8. A cost that has both a fixed and variable component is called a(n) ___ cost. a. Mixed (semi-variable cost) 9. Which of the following occur when activity level decreases? a. Fixed cost per unit increases b. Total fixed cost remains constant 10. The amount available after all variable expenses are deducted is the a. Contribution margin 11. The range of activity over which a cost is defined as either fixed or variable is called the ____ range. a. Relevant 12. Assume a company has a revenue of $1,000, variable costs of $600, net income of $50, and fixed costs of $350. What is the magnitude of operating leverage? a. 8 13. Assume that a company’s magnitude of operating leverage is 2. A 10% increase in revenue will lead to what percentage increase in net income? a. 20% i. 10%*2=20% 14. The possibility that sacrifices may exceed benefits is called ___. a. Risk 15. What happens if the activity level changes? a. Fixed cost per unit changes b. Total fixed cost remains constant 16. Assuming a firm has no operating leverage, a small change in revenue will lead to a a. Small change in profitability 17. If a change in volume does not affect the total cost, the cost is define as a(n) ___ cost. a. Fixed 18. True or False? Fixed costs increase risk. a. True i. Fixed costs increase risk by adding operating leverage 19. Assuming a company sold 300 units in Year 1 and 450 units in Year 2. What is the percentage change in units sold from Year 1 to Year 2? a. 50% i. (alternative measure – base measure)/basemeasure = percent change ii. (450-300)/300=50% 20. Assume that a law firm incurs rent cost of $3,000 a month. The building the firm rents can staff up to 10 employees. This cost is a. Fixed from 1-10 employees i. The range of activity over which the definition of fixed costs is valid is referred to as the relevant range. In this example, the relevant range is from 1 to 10 employees indicating that the rent cost is fixed as long as the number of employees is between 1 and 10. 21. On a scattergraph, the point where the line intercepts the Y axis is a. Fixed cost 22. The following information was drawn from a scattergraph: Total cost at 5,000 units is $100,000. The line on the scattergraph intersects the Y axis at $20,000. What is variable cost per unit? a. 16 23. Assume the following: 1) the scattergraph intersects the Y axis at $100; 2) the estimated line on the scattergraph increases by $5 for every 1 unit of volume increase. What is total cost if volume is 0? a. $100 24. Least-squares regression is a better method to estimate fixed and variable costs because a. It is more accurate than a scattergraph 25. R square represents the percentage of change in a. The dependent variable (total cost) that is explained by a change in the independent variable. 26. The primary difference between regression and multiple regression is that in multiple regression there are a. Multiple independent variables 27. R square can range from a. 0 to 100 28. Multiple regression explains the dependent variable with a. Multiple independent variables 29. The ability of fixed costs to magnify changes in sales to create disproportionate changes in profitability is called ___ leverage. a. Operating 30. Assume that a company’s magnitude of operating leverage is 10. A 1% increase in revenue will lead to what percentage increase in net income? a. 10% i. 1%*10=10% 31. Assume a company sold 50 units in Year 1 and 80 units in Year 2. What is the percentage change in units sold from Year 1 to Year 2? a. 60% 32. Risk is increased when the cost structure a. Relies heavily on fixed costs 33. If a change in volume does not affect the total cost, the cost is defined as a a. Fixed cost 34. Using the high low method we estimated fixed costs to be $200,000 and variable costs to be $15 a unit. If 10,000 units are produced what is total cost? a. 350,000 i. Total cost = $200,000 + ($15 * 10,000_ 35. Calculate variable cost per unit using the high-low method: a. 9.60 i. Use numbers from the lowest and highest sales volume, not cost. ($2100900)(200-75) = $9.60 36. Assume that a company’s magnitude of operating leverage is 8. A 20% increase in revenue will lead to what percentage increase in net income? a. 160% i. 8*20% 37. Which of the following situations would be appropriate to calculate average cost per unit over a one day period? a. Sales volume does not fluctuate on a day to day/ i. If sales volume fluctuates then you will get a different average cost per unit depending on the day you choose. In this case, it is recommended to use a longer time period such that the volume fluctuations are averaged out. 38. a. 180 i. The variable cost per unit is $9.60 ($2100-900)/(200-75) = $9.60 ii. $9.60 x 200 units = $1,920 variable cost. iii. $2,100 – 1920 = $180 fixed cost