FIN120- Break-Even.docVIP

TOTAL REVENUE APPLICATION At a price of $3 each, SHAPE magazine sells 1.25 million copies of its magazine targeted to young women seeking a healthier lifestyle. If the price is increased to $3.25 each, only 1 million copies will be sold. Fixed costs are $1 million and unit variable costs are $0.50 per magazine. From the information provided here, what is SHAPE magazines total revenue, obtained at the higher price? a. $3,750,000 b. $3,250,000 c. $2,125,000 d. $1,625,000 e. $675,000 Answer: b Rationale: Total revenue = Price x Quantity. Total revenue at the higher price is equal to the price of $3.25 x the quantity of 1,000,000 copies, or $3,250,000. TOTAL COST DEFINITION The sum of fixed and variable costs is called: a. marginal cost. b. value added. c. average cost. d. total administrative overhead. e. total cost. Answer: e FIXED COST DEFINITION Fixed cost refers to: a. the sum of the firm’s expenses that vary directly with the quantity of the product produced and sold. b. the total expense incurred by a firm in producing and marketing a product or service. c. the firm’s expenses that are stable and do not change with the quantity of the product that is produced and sold. d. the consideration exchanged for the ownership or use of a good or service. e. total firm expenses incurred in producing or selling one additional unit of product. Answer: c Which of the following is a typical example of a fixed cost? a. sales taxes b. building rental expense c. raw materials d. sales commissions e. hourly wages Answer: b Rationale: Fixed costs are the firm’s expenses that are stable and do not change with the quantity of product that is produced and sold. The building rental expense is stable regardless of how much the firm produces and sells.  VARIABLE COST DEFINITION Variable cost is the: a. total expense incurred by a firm in producing and marketing a produ