Business Expenses and Financial Capital Drill 23

Question 1. What are Calderwright's total monthly fixed costs?

• A) 12,000
• B) 18,000 ✓
• C) 42,000
• D) 60,000

Explanation: Q1: Data interpretation. The answer is 18,000. The fixed costs are factory rent (8,000), supervisor salary (6,000), and equipment depreciation (4,000): 8,000 + 6,000 + 4,000 = 18,000. 12,000 omits one fixed line. 42,000 is the total of the variable costs, not the fixed ones. 60,000 is total cost across both categories.

Question 2. Steel and raw materials are labeled a direct cost. What makes a cost direct rather than indirect?

• A) It stays the same no matter how many tools are produced
• B) It is paid only once and cannot be recovered
• C) It is set by an outside supplier rather than the firm
• D) It can be traced to a specific product the firm makes ✓

Explanation: Q2: Concept. The answer is that it can be traced to a specific product the firm makes. Steel goes directly into the tools, so it is a direct cost; the direct/indirect split is about traceability to a product. The first choice describes a fixed cost (the fixed/variable axis), not a direct cost. The second describes a sunk cost. The third is irrelevant to whether a cost is direct, since supplier-set prices can be either direct or indirect.

Question 3. Under Option A, how much simple annual interest would Calderwright owe on the 100,000 dollar loan in one year?

• A) 8,000 ✓
• B) 10,000
• C) 16,000
• D) 20,000

Explanation: Q3: Calculation. The answer is 8,000. Simple annual interest is 100,000 x 8 percent = 8,000. 10,000 uses 10 percent. 16,000 doubles the one-year figure as if for two years. 20,000 confuses the interest with the investor's 20 percent profit share under the other option.

Question 4. Suppose Calderwright expects 90,000 dollars of annual profit before financing costs or investor distributions. Comparing the two options in that year, which statement is correct?

• A) Option B costs less because no interest is charged
• B) Both options cost the same in that year
• C) Option A costs 8,000 while Option B costs the owner 18,000 of profit, so Option A is cheaper that year ✓
• D) Option A is cheaper only because the owner gives up ownership instead of paying loan interest for the company in question

Explanation: Q4: Decision (apply criteria). The answer is that Option A costs 8,000 while Option B costs the owner 18,000 of profit, so Option A is cheaper that year. Debt interest is 100,000 x 8 percent = 8,000; the equity investor's 20 percent share of 90,000 profit is 18,000, so debt is the cheaper financing in a year with that profit. The first choice is wrong because Option B still has a real cost, the 18,000 profit share, even with no interest. The second is wrong because 8,000 does not equal 18,000. The fourth reverses the ownership effect, since it is Option B (equity), not Option A, that gives up ownership.

Question 5. Late in the year the supervisor suggests recording some of the steel purchases as factory rent so the variable-cost line looks lower to a lender. For deciding how this pressure could affect the business, this is best treated as:

• A) an opportunity cost of buying the machine
• B) an internal ethics-and-control issue involving misclassified costs ✓
• C) a fixed cost that will not change with output
• D) a marketing decision about how to promote the tools to new lenders

Explanation: Q5: Decision (internal factor). The answer is that it is an internal ethics-and-control issue involving misclassified costs. Deliberately moving steel (a variable, direct cost) into rent (a fixed, indirect line) would distort the statements a lender relies on, an internal factor that can mislead lenders and harm the firm's credibility and access to credit. It is not an opportunity cost, which is the value of a forgone alternative. It is not a fixed cost; the misclassification is the issue, not a cost category. It is not a marketing decision, since it concerns financial reporting, not promotion.