Deck 7: Understanding and Managing Start-Up, Fixed, and Variable Costs

Question 1

You should keep reserves of at least ________.

A) 3 months of fixed operating costs
B) 6 months of fixed operating costs
C) one half of the start-up investment
D) one year of fixed operating costs

Answer 1

C

Question 2

Business start-up cost information can be obtained from ________.

A) advisors
B) quotations from vendors
C) industry data
D) All of the above.

Answer 2

D

Question 3

A critical cost for a beginning business is the seed capital.

Answer 3

True

Question 4

Start-up investment is the one-time expense of opening a business. It is also called ________.

A) entry cost
B) seed capital
C) down payment
D) beginning capital

Question 5

A litmus test for profitability is ________.

A) the business plan
B) the economics of one unit (EOU)
C) the business model
D) net profit

Question 6

Explain the concept of payback period.

Question 7

The Thomas Register of American Manufacturers lists companies that specialize in creating ________.

A) products
B) prototypes
C) copyrights
D) services

Question 8

If you sell $2500 worth of product, pay COGS of $800 and other variable costs of $360, what is your gross profit?

A) $1340
B) $1700
C) $2464
D) $2500

Question 9

Which two categories below are used for business costs?

A) materials and labor
B) gross and net
C) fixed and variable
D) cost of goods sold and administrative

Question 10

The bedrock principle of business is that it should ________.

A) please its customers
B) advertise better than its competitors
C) earn a profit
D) continually improve

Question 11

A(n) ________ is a model or pattern that serves as an example of how a product would look and operate if it were manufactured.

A) prototype
B) archetype
C) typology
D) model

Question 12

________ will tell you how long it will take you to earn enough profit to cover your start-up investment.

A) Return on sales
B) Return on assets
C) Payback
D) ROI

Question 13

What are variable costs? How are they broken down?

Question 14

The cost of material used to make a product and cost of labor used to make the product is associated specifically with a single ________ of sale.

A) unit
B) hour
C) dozen
D) dollar

Question 15

Variable costs are expenses that must be paid regardless of whether sales are being generated.

Question 16

Carla sells hot coffee, cider and tea from a sidewalk cart near Wall Street in New York City. Last month she sold $4,500 worth of product to 1,000 customers. She spent $800 on buying her beverages in bulk. Her monthly costs are: Utilities = $100, Salary = $2,000, Advertising = $0, Insurance = $0, Interest = $0, Rent (cart) = $500, Depreciation = $0. What is Carla's monthly cost of goods sold?

A) $800
B) $600
C) $450
D) $100

Question 17

Depreciation is a(n) ________.

A) fixed operating cost
B) variable cost
C) flexible cost
D) administrative cost

Question 18

Other variable costs per unit subtracted from Total COGS per unit equals ________.

A) cost of goods sold per unit
B) contribution margin per unit
C) total other variable costs per unit
D) operating margin per unit

Question 19

There are two categories of variable costs: ________.

A) net variable costs and cost of goods sold
B) gross costs and net variable costs
C) cost of goods sold and other variable costs
D) interest and taxes paid

Question 20

It is wise to keep a reserve equal to one-fourth of the start-up investment.

Question 21

________ is what remains when you subtract fixed and variable costs and taxes from revenues.

A) Operating profit
B) Gross profit
C) Net profit
D) Gross margin

Question 22

The percentage of value of an asset subtracted each year until the value becomes zero, to reflect wear and tear on the asset, is called ________.

A) depreciation
B) inventory
C) deductible
D) reduction

Question 23

Carla sells hot coffee, cider and tea from a sidewalk cart near Wall Street in New York City. Last month she sold $4,500 worth of product to 1,000 customers. She spent $800 on buying her beverages in bulk. Her monthly costs are: Utilities = $100, Salary = $2,000, Advertising = $0, Insurance = $0, Interest = $0, Rent (cart) = $600, Depreciation = $0. Calculate Carla's average sale per customer.

A) $4.50
B) $4.00
C) $5.00
D) $0.80

Question 24

Jenny is worried because when she calculates the EOU for her business, the gross profit is too low. Explain whether or not she could improve it by finding an office with a lower monthly rent.

Question 25

Fixed operating costs can change over time.

Question 26

In the phrase I SAID U R + "Other FXs", UR stands for ________.

A) utilities, rent
B) unknown rates
C) unforeseen revisions
D) unforeseen rates

Question 27

Record keeping for a very small business can be accomplished by a journal and files for storing ________.

A) records of transactions
B) details of seed capital
C) details of start-up expenses
D) details of marginal costs

Question 28

The difference between a receipt and an invoice is that the receipt records ________.

A) sales
B) interest paid
C) purchases
D) credit transactions

Question 29

Describe how an entrepreneur should protect his/her financial records.

Question 30

Carla sells hot coffee, cider and tea from a sidewalk cart near Wall Street in New York City. Last month she sold $4,500 worth of product to 1,000 customers. She spent $800 on buying her beverages in bulk. Her monthly costs are: Utilities = $100, Salary = $2,000, Advertising = $0, Insurance = $0, Interest = $0, Rent (cart) = $500, Depreciation = $0. What are Carla's fixed costs?

A) $2,000
B) $2,100
C) $2,600
D) $2,700

Question 31

If a business sells 5,000 units for a total profit of $200,000, what is its profit per unit?

A) $50
B) $400
C) $40
D) $500

Question 32

________ is a review of financial and business records to ascertain integrity and compliance with standards and laws, particularly by the U.S. Internal Revenue Service.

A) Scrutiny
B) Assessment
C) Due diligence
D) Audit

Question 33

Why is it best to pay expenses for your business with a check, not with cash?

A) A check can't be traced.
B) Cash is easier to lose.
C) A check provides written proof of payment.
D) Paying with a check keeps check printing companies and banks in business.

Question 34

The systematic recording, reporting, and analysis of the financial transactions of a business is called ________.

A) accounting
B) reconciliation
C) cost analysis
D) cash flow analysis

Question 35

Give three reasons to keep good records every day.

Question 36

Depreciation is the percentage of value of an asset added each year to reflect wear and tear on the asset.

Question 37

Which of the following is not a category of fixed costs?

A) rent
B) advertising
C) capital
D) depreciation

Question 38

Total Revenue divided by ________ = units sold.

A) selling price
B) profit
C) total operating costs
D) cost

Question 39

If a business has total gross profit of $14,720 and total operating costs of $11,500, what is its net profit?

A) $3,000
B) $3,220
C) $1,150
D) $0

Question 40

Fixed operating costs ________.

A) are not included in COGS
B) are not direct costs of creating each product
C) include expenses like rent
D) All of the above.