Question 1: How do variable costs and fixed costs differ? Give an example of each.
Question 2: What is C-V-P analysis used for? In the process of using C-V-P analysis, what does it mean to "break even"?
Question 3: What is the difference between a direct cost and an indirect cost? Give an example of each in the context of teaching an accounting class at your school.
Question 4: How can out-of-pocket costs and opportunity costs be applied to your personal financial decisions?
Question 5: Fixed Costs and Variable Costs
Which of the following is an example of a variable cost?
a. Insurance premium for fire insurance on the factory building
b. The salary of the company president
c. Wood used to make custom tables
d. Rent for use of a storage warehouse
e. Depreciation on the factory building
Question 6: Direct and Indirect Costs
Which one of the following statements best explains why companies want to distinguish between direct and indirect costs?
a. To evaluate business segments on the basis of only those costs directly traceable to each segment
b. To better determine whether a company is a large organization or a small organization
c. To determine the sales prices necessary to break even
d. To better distinguish between variable and fixed costs for each product
e. To better distinguish between materials costs and labor costs
Question 7: Out-of-Pocket Costs and Opportunity Costs
Which one of the following is an example of an opportunity cost?
a. Revenue lost from sale of cakes by deciding to sell only cookies
b. Wages paid to construction workers
c. Materials used to assemble computers
d. Ordering costs related to a customer's special order of guitar strings
e. Rent paid for the use of a factory building
Question 8: Cost Classifications
The following are costs associated with manufacturing firms, merchandising firms, or service firms:
a. Miscellaneous materials used in production
b. Salesperson's commission in a real estate firm
c. Administrators' salaries for a furniture wholesaler
d. Administrators' salaries for a furniture manufacturer
e. Freight costs associated with acquiring inventories for a grocery store
f. Office manager's salary in a doctor's office
g. Utilities for the corporate offices of a toy manufacturer
h. Line supervisor's salary for a clothing manufacturing firm
i. Training seminar for sales staff of a service firm
j. Fuel used in a trucking firm
k. Paper used at a printing business
l. Oil for machinery at a plastics manufacturing firm
m. Food used at a restaurant
n. Windshields used for a car manufacturer
Classify the costs as (1) product or period; (2) variable or fixed; and (3) for those that are product costs, as direct materials, direct labor, or manufacturing overhead. Write "not applicable (N/A)" if a category doesn't apply.
Question 9: Working Capital Management. Indicate how each of the following six different transactions that Dynamic Mattress might make would affect (i) cash and (ii) net working capital:
a. Paying out a $2 million cash dividend.
b. A customer paying a $2,500 bill resulting from a previous sale.
c. Paying $5,000 previously owed to one of its suppliers.
d. Borrowing $1 million long-term and investing the proceeds in inventory.
e. Borrowing $1 million short-term and investing the proceeds in inventory.
f. Selling $5 million of marketable securities for cash.
Question 10: Managing Working Capital. A new computer system allows your firm to more accurately monitor inventory and anticipate future inventory shortfalls. As a result, the firm feels more able to pare down its inventory levels. What effect will the new system have on working capital and on the cash conversion cycle?
Question 11: What is meant by the relevant range?