Chris Muss is going to sell Ad-hoc compact disks for $40 a box; one box is considered to be one unit. The disks cost Chris $10 a unit. She is planning to rent a booth at the up-coming Area Computer Show. She has three options for attending the show:
1) paying a fixed fee of $3,000;
2) paying a $1,000 fee plus 10% of her revenue made at the convention, or;
3) paying 25% of her revenue made at the convention.
Which of the following statements is TRUE?
A) CVP analysis can show that the risks are identical in each case.
B) The break-even point is the identical in each case.
C) Fixed costs are inherent in all of the options.
D) One of the options will allow Chris Muss to break-even, even if she doesn't sell any disks, assuming she can return any unsold disks for a full refund.
E) Operating income per unit is the same in each case, as both selling price and costs are the same.

Question

Quizplus · Accepted Answer

Fixed costs are present in options 1 and 2, but not in option 3, as it entirely depends on the revenue generated. Option 1 has a fixed cost of $3,000, and option 2 has a fixed cost of $1,000 plus a variable component. Option 3's cost is purely variable (25% of revenue), meaning if no revenue is generated (no disks sold), Chris Muss would not owe anything, fitting the scenario described in choice D.

Chris Muss Is Going to Sell Ad-Hoc Compact Disks for $40