Question

A company is trying to decide to pay employees a fixed salary or an hourly wage.

If the company decides to pay salaries, which statement is true?

(2pts)

Paying salaries would have no affect on fixed costs or the contribution margin.

Salaries decrease the total fixed costs and the contribution margin would be lower.

Salaries increase total fixed costs and the contribution margin would be higher.

2)

A company is trying to decide to pay employees a fixed salary or an hourly wage.

If the company decides to pay hourly wages, which statement is true?

(2pts)

Hourly wages would decrease the variable costs and decrease the contribution margin.

Hourly wages would increase the variable costs and decrease the contribution margin.

Hourly wages would increase the variable costs and increase the contribution margin.

3)

A company is trying to decide if they should pay commissions to the salespeople based on their total sales.

If the company decides to pay their salespeople commissions as stated above, which statement is true?

(2pts)

Variable costs and contribution margin would not be affected.

Variable costs and the break-even point would decrease while the contribution margin and margin of safety would increase.

Variable costs and the break-even point would increase while the contribution margin and margin of safety would decrease.

4)

A company is considering purchasing a building. The purchase of the building will increase their fixed costs.

This purchase will _______________ the break-even point?

(2pts)

Not affect

Decrease

Increase

5)

A company is considering purchasing a building. The purchase of the building will increase their fixed costs.

This purchase will _______________ the margin of safety?

(2pts)

Increase

Decrease

Not affect

6)

A company is considering purchasing a building. The purchase of the building will increase their fixed costs.

This purchase will _______________ the degree of operating leverage?

(2pts)

Decrease

Not affect

Increase

Answer 1

1.

If the company pays fixed salaries, the total fixed costs will increase and total variable costs would decrease.

The reduction in variable costs increases the Contribution margin (Sales - Variable costs)

The answer is - Salaries increases total fixed costs and the contribution margin would be higher.

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2.

Paying the hourly wages would increase the Variable costs(as they are based on the number of hours) and decrease the contribution margin (Sales - Varibale costs)

The answer is - Hourly wages would increase the variable costs and decrease the contribution margin.

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3.

Paying the sales comission based on total sales increases the variable costs  

Increasing the variable cost decreses the contribution margin (sales - variable costs)

Decreasing Contribution margin Increases the Breakeven point (Fixed costs / Contribution margin)

Increase in Breakeven point decrease Margin of safety (Sales - Breakeven sales)

The answer is - Variable costs and the Breakeven point would increase while the contribution margin and margin of safety would decrease.

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4.

Increase in fixed costs increases the Breakeven point (Fixed costs / Contribution margin per unit)

The answer is - Increase

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5.

With the increase in fixed costs Breakeven point Increases (Fixed cost / Contribution margin per unit)

With the increase in Breakeven point Margin of safety decreases (Sales - Breakeven sales)

The answer is - Decrease.

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6.

With the increase in Fixed costs Operating Income decreases (sales - variable costs - fixed costs)

With the increase Decrease in operating income Operating leverage Increases (Contribution / Operating income)

The answer is - Increases.