Objective 3.6
Answer the following questions using the information below:
Southwestern College is planning to hold a fund raising banquet at one of the local country clubs. It has two options for the banquet: OPTION one: Crestview Country Club a. Fixed rental cost of $1,000 b. $12 per person for food OPTION two: Tallgrass Country Club a. Fixed rental cost of $3,000 b. A caterer who charges $8.00 per person for food
Southwestern College has budgeted $1,800 for administrative and marketing expenses. It plans to hire a band which will cost another $800. Tickets are expected to be $30 per person. Local business supporters will donate any other items required for the event.
1) Which option provides the least amount of risk? A) Option one B) Option two
C) Both options provide the same amount of risk. D) Option one is risk-free Answer: A
Diff: 1
Objective: 6
AACSB: Analytical thinking
2) Which option has the lowest breakeven point? A) Option one B) Option two
C) Both options have the same breakeven point.
D) The lowest breakeven point cannot be determined. Answer: A
Explanation: A)
Option one: $30X - $12X - $1,000 - $1,800 - $800 = 0; X = $200 Option two: $30X - $8X - $3,000 - $1,800 - $800 = 0; X = $255
Diff: 2
Objective: 6
AACSB: Analytical thinking
41
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3) Which option provides the greatest operating income if 600 people attend? A) Option one B) Option two
C) Operating incomes are identical.
D) Both the options have 0 operating income as they are operating at breakeven point. Answer: B
Explanation: B) Option one: $18 × 600 - $3,600 = $7,200; Option two: $22 × 600 - $5,600 = $7,600
Diff: 3
Objective: 6
AACSB: Application of knowledge
4) Which option provides the greatest degree of operating leverage if 600 people attend? A) Option one B) Option two
C) Both options provide equal degrees of operating leverage. D) Operating leverage is indeterminable. Answer: B
Explanation: B) Option one: $18 × 600 / $7,200 = 1.50; Option two: $22 × 600 / $7,600 = 1.74
Diff: 3
Objective: 6
AACSB: Application of knowledge
5) Option one: Fixed costs of $10,000 and a breakeven point of 500 units. Option two: Fixed costs of $20,000 and a breakeven point of 700 units.
Which option should you choose if you are expecting to produce 600 units? A) Option one as sales is higher than breakeven B) Option two as sales is lower than breakeven
C) Option two as it would lead to a higher operating income D) Option one as fixed costs is more Answer: A
Explanation: A) Option one will result in operating income while Option 2 will result in an operating loss.
Diff: 2
Objective: 6
AACSB: Application of knowledge
6) Sales of Blistre Autos are 350,000, variable cost is 200,000, fixed cost is 75,000, tax rate is 20%. Calculate the operating leverage of the company. A) 1.00 time B) 1.50 times C) 2.50 times D) 2.00 times Answer: D
Explanation: D) Operating income $350,000 - $200,000 - $75,000 = $75,000 Operating leverage $150,000 / $75,000 = 2 times
Diff: 2
Objective: 6
AACSB: Application of knowledge
42
Copyright ? 2015 Pearson Education, Inc.
7) In a company with low operating leverage, ________. A) fixed costs are more than the contribution margin
B) contribution margin and operating income are inversely related C) there is a higher possibility of net loss than a higher-leveraged firm D) less risk is assumed than in a highly leveraged firm Answer: D
Diff: 1
Objective: 6
AACSB: Analytical thinking
8) If the contribution margin ratio is 0.40, targeted operating income is $80,000, and targeted sales volume in dollars is $500,000, then the degree of operating leverage is ________. A) 1.50 times B) 2.00 times C) 2.50 times D) 3.00 times Answer: C
Explanation: C) 0.40 = X / $500,000 = $200,000 contribution. Operating leverage = $200,000 / $80,000 = 2.50
Diff: 3
Objective: 6
AACSB: Application of knowledge
9) If the contribution margin ratio is 0.40, targeted operating income is $50,000, and fixed costs are $75,000, then sales volume in dollars is ________. A) $250,000 B) $312,500 C) $275,000 D) $350,000 Answer: B
Explanation: B) X = (50,000 + 75,000)/.4; X = $312,500
Diff: 2
Objective: 6
AACSB: Application of knowledge
10) If the contribution margin ratio is 0.25, targeted operating income is $50,000, and targeted sales volume in dollars is $250,000, then total fixed costs are ________. A) $11,500 B) $15,000 C) $20,000 D) $12,500 Answer: D
Explanation: D) (X + $50,000)/0.25 = $250,000; X = 12,500
Diff: 3
Objective: 6
AACSB: Application of knowledge
43
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11) Fixed costs ________.
A) are considered variable costs over the long run B) provide less operating leverage C) reduce the risk of loss
D) are graphed as a steeply sloped line Answer: A
Diff: 1
Objective: 6
AACSB: Analytical thinking
12) When a greater proportion of costs are fixed costs, then ________.
A) a small increase in sales results in a small decrease in operating income B) when demand is low the risk of loss is high
C) a decrease in sales reduces the total fixed cost per unit D) a decrease in sales reduces the cost per unit Answer: B
Diff: 2
Objective: 6
AACSB: Application of knowledge
13) Companies with a greater proportion of direct costs have a greater risk of loss than companies with a greater proportion of indirect costs. Answer: FALSE
Explanation: Companies with a greater proportion of fixed costs have a greater risk of loss than companies with a greater proportion of variable costs.
Diff: 2
Objective: 6
AACSB: Application of knowledge
14) The degree of operating leverage at a specific level of sales helps the managers calculate the effect that potential changes in sales will have on operating income. Answer: TRUE
Diff: 1
Objective: 6
AACSB: Analytical thinking
15) If a company increases fixed costs, then the breakeven point will be lower. Answer: FALSE
Explanation: If a company increases fixed costs, then the breakeven point will be higher.
Diff: 2
Objective: 6
AACSB: Application of knowledge
44
Copyright ? 2015 Pearson Education, Inc.
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