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Exam 2: Cost Behavior and Cost Estimation

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Question 91

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Since a mixed cost has both a fixed and a variable component,

A) neither total cost nor unit cost will vary with changes in the level of activity.
B) total cost will vary with changes in the level of activity, but unit cost will not.
C) unit cost will vary with changes in the level of activity, but total cost will not.
D) both the total cost and the unit cost will vary with changes in the level of activity.

E) B) and C)
F) None of the above

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Question 92

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Dana owns her own real estate agency.She has been working hard to increase her client base.She offers the most comprehensive advertising campaign in the city and it has been paying off by the steady increase in the number of listings over the last several months.However, Dana is concerned that her extensive cost for advertising is eating into her profits.It is difficult to determine how much she spends on advertising for each listing because some of her advertising sources are fixed amounts each month and others are more variable in nature.She would like to analyze the following information to determine how her advertising costs behave based on the number of listings. Using the high-low method, what is the fixed cost of advertising each month?

A) $2,360
B) $2,074
C) $2,900
D) $1,860

E) A) and D)
F) All of the above

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Question 93

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Hartland Horticulture provides and maintains live plants in office buildings.The company's 850 customers are charged $30 per month for this service, which includes weekly watering visits.The variable cost to service a customer's location is $18 per month.The company incurs $2,000 each month to maintain its fleet of four service vans and $3,000 each month in salaries.Hartland pays a bookkeeping service $2 per customer each month to handle all invoicing and accounting functions. Required: a.Prepare Hartland's contribution format income statement for the month. b.What is the expected monthly operating income if 150 customers are added? c.Mr.Hartland is exploring options to reduce the annual bookkeeping costs. Option 1:Renegotiate the current contract with the bookkeeping service to pay a flat fee of $10,200 per year plus $1 per customer per month. Option 2:Hire a part-time bookkeeper for $18,000 per year to handle the invoicing and simple accounting.Harland will need to pay $5,000 per year to have taxes and year-end financial statements prepared. Compare the current bookkeeping cost with the two options at customer levels of 850, 1,000, and 1,100. d.In addition to the bookkeeping costs incurred, what should Mr.Hartland consider before he makes a change in bookkeeping services?

A contribution format income statement allows a manager to

An example of a committed fixed cost is

Step costs are fixed over only a small range of activity.

GAAP-based income statements categorize expenses based on

A statistical technique that identifies the line of best fit for the points plotted in a scattergraph is called

Nancy's Nursery provides and maintains live plants in office buildings.The company's 120 customers are charged $90 per month for this service, which includes weekly watering visits.The variable cost to service a customer's location is $22 per month.The company incurs $2,000 each month to maintain its equipment and service vans and $3,000 each month in salaries.Nancy pays a CPA firm $5 per customer for accounting services. Required: a.Prepare Nancy's contribution format income statement for the month. b.What is the expected monthly operating income if 10 customers are added?

When managers talk about cost behavior, they are referring to the way in which total costs change in response to changes of the level of activity.List the four common cost behavior patterns that serve as the foundation for cost-volume-profit analysis and give an example of each.