Part I: T/F Questions and Multiple-Choice Questions

___1. When there is a small change in demand following a large change in price, this is known as inelastic demand.

___2. A fixed cost is one that never changes, even in the long run.

___3. A variable cost is one that varies in linear fashion with sales revenue.

___4. A sunk cost is one that is not normally relevant to future decisions.

1. A companys sales revenue for the year is $1,000,000 and net income $50,000. Average total assets are $750,000. Average stockholders equity is $250,000. Return on stockholders equity is:

(a) 10.0%

(b) 20.0%

(c) 5.0%

(d) 6.7 %

2. A menu item has a food cost of $5.00 and the selling price is based on a 40% cost. The selling price of the menu item is:

(a) $ 8.00

(b) $12.50

(c) $ 7.00

(d) $20.00

3. A sunk cost is one that is:

(a) Made when excavating for a new swimming pool

(b) Not relevant to the present decision

(c) Controllable in the future

(d) The same as an opportunity cost

4. One can sell below cost when the sales revenue:

(a) Would otherwise go to a competitor

(b) Is below total cost but covers variable costs and contributes towards fixed costs

(c) Covers fixed costs but not necessarily all variable costs

(d) Covers all direct costs

5. Sales sales revenue in a restaurant open every day for a week is $5,296. The restaurant has 60 seats. Seat turnover is 1.5 per day. Average check is:

(a) $17.64

(b) $11.76

(c) $12.60

(d) $ 8.41

6. Which of the following costs is primarily fixed?

(a) Food cost

(b) Insurance

(c) Labor cost

(d) Operating supplies