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# Multiple choice questions

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Holding all other factors constant, the break-even point will be decreased by
a. increasing the fixed costs.
b. decreasing the contribution margin.
c. increasing the selling price.
d. increasing the variable cost per unit.

Louie's Lunch Counter's employees know that they serve three meat and potatoes lunches for every two soup and salad lunches on a typical day. The variable costs for a meat and potatoes lunch total \$3.30, while the variable costs for the soup and salad lunch are \$2.85. The price for any lunch is \$5.75. If fixed costs are \$120,802, how many lunches must be sold for Louie's to earn a profit of \$77,520?

a. 57,485
b. 42,387
c. 38,509
d. 61,400

Just Rain Company produces two models, Wind and Hail, using Thor, a new manufacturing process. Information regarding Wind and Hail is summarized in the following table:

Wind Hail
Price per unit \$80 \$60
Variable cost per unit \$50 \$30
Amount of Thor processing time
required per unit 6 hours 2 hours

Thor can only be used for 120 hours per wek. Should Just Rain produce Wind or Hail?

a. The company is indifferent between the two products, since the contribution margin per unit is the same.
b. The company should produce Wind because the total contribution margin will be \$600.
c. The company should produce Hail because the total contribution margin will be \$1,800.
d. The problem does not provide enough information to make a decision.

#### Solution Preview

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Please see the response as below. Answers and explanations are given next to each question.

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1. Holding all other factors constant, the break-even point will be decreased by
a. increasing the fixed costs.
b. decreasing the contribution margin.
c. increasing the selling price.
d. increasing the variable cost per unit.
Key: Break even point is given by fixed cost divided contribution margin.
Increasing fixed cost (numerator) will increase break-even point
Decreasing contribution margin (denominator) will increase break-even point
Increasing selling price will increase the contribution margin (denominator) and in turn will decrease break-even point
Increasing variable cost per unit will decrease contribution margin (denominator) and in turn will increase break-even point