Which option provides the greatest degree of

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Chapter 21 / Exercise 21-3
Accounting
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129. Which option provides the greatest degree of operating leverage if 600 people at- tend? a. Option one b. Option two c. Both options provide equal degrees of operating leverage. d. Operating leverage is indeterminable. Answer : b Difficulty : 3 Objective : 6 Terms to Learn : operating leverage
Option 1: $18 x 600 / $7,200 = 1.50; Option 2: $22 x 600 / $7,600 = 1.74 130. Option 1: Fixed costs of $10,000 and a breakeven point of 500 units. Option 2: 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? Difficulty : 2 Objective : 6
Terms to Learn : operating leverage Option 1 will result in operating income while Option 2 will result in an operating loss. 131. Mrs. Granberry is going to sell Christmas tree lights for $20 a box. The lights cost Marsha $5 a unit and any unsold lights can be returned for a full refund. She is planning to rent a booth at the upcoming Happy Holidays Convention, which offers three options: 1. paying a fixed fee of $1,500, or 2. paying a $500 fee plus 10% of revenues made at the convention, or 3. paying 25% of revenues made at the convention. Which of the following statements is FALSE? Difficulty : 3 Objective : 6
Terms to Learn : operating leverage 132. In a company with low operating leverage:
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Chapter 21 / Exercise 21-3
Accounting
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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 Difficulty : 3 Objective : 6 Terms to Learn : operating leverage 133. If the contributionmargin ratio is 0.30, targeted net income is $76,800, and targeted sales volume in dollars is $480,000, then total fixed costs are: a. $23,000 b. $44,160 c. $67,200 d. $144,000 Answer : c Difficulty : 3 Objective : 6 Terms to Learn : contribution margin ratio (X + $76,800)/0.30 = $480,000; X = $67,200
134. Fixed costs: Difficulty : 2 Objective : 6
Terms to Learn : operating leverage 135. When a greater proportion of costs are fixed costs, then: Difficulty : 2 Objective : 6
Terms to Learn : operating leverage THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 136 THROUGH 139: The following information is for Barnett Corporation: Product X: Revenue $10.00 Variable Cost $2.50 Product Y: Revenue $15.00 Variable Cost $5.00 Total fixed costs $50,000 3-22

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