Drill 23 ·
Business Expenses and Financial Capital Drill 23 is a practice drill. It contains 5 original questions created by Brian Stewart, a Barron's test prep author with over 20 years of tutoring experience.
A tool manufacturer classifies its costs and weighs a debt-versus-equity funding choice; uses an invented company and original figures.
Calderwright Tools manufactures hand tools. The monthly costs below are each labeled two ways: fixed or variable (does the total change as output changes?) and direct or indirect (can it be traced to a specific product?). All figures are in dollars per month.
Calderwright Tools: Monthly Cost Schedule
| Cost | Amount | Fixed/Variable | Direct/Indirect |
|---|---|---|---|
| Factory rent | 8,000 | Fixed | Indirect |
| Steel and raw materials | 22,000 | Variable | Direct |
| Assembly-line wages | 15,000 | Variable | Direct |
| Factory supervisor salary | 6,000 | Fixed | Indirect |
| Equipment depreciation | 4,000 | Fixed | Indirect |
| Packaging materials | 5,000 | Variable | Direct |
| Total | 60,000 |
Separately, Calderwright needs 100,000 dollars to buy a new cutting machine and is weighing two ways to raise it. Option A (debt): a loan charging 8 percent simple annual interest; the owner keeps 100 percent ownership. Option B (equity): sell a 20 percent ownership stake to an investor for 100,000 dollars; no interest is owed, but the investor then receives 20 percent of annual profit.