Mike Contracted to Buy Rita's House in a Written Contract

question 57

Multiple Choice

Mike contracted to buy Rita's house in a written contract that provided for a deposit of $10,000 to be forfeited in the event of Mike's failing to go through with the deal. This deposit was an honest estimate of the damages Rita would suffer. On these facts, which of the following is true?

• A) If Mike breaches the contract, he will have to pay Rita all the damages that directly and naturally flow from the breach.
• B) If Mike breaches the contract, he would not have to pay $10,000, even if Rita suffered a substantial loss.
• C) If Mike breaches the contract, he would have to pay $10,000 even if Rita's actual loss was $40,000.
• D) If the contract price agreed upon was $150,000 and Rita, after Mike breaches the contract, sells the house in one week for $138,000, she will still be able to recoup all her losses.
• E) A clause in a contract that provides for the forfeiture of a deposit is called an exemption clause.

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Definitions:

Break-even Sales

The amount of revenue needed to cover total costs, at which point a business neither makes a profit nor incurs a loss.

Overall

Pertaining to the total, aggregate, or general effect, situation, or assessment.

Absorption Costing

In this accounting method, the complete cost of manufacturing a product, taking into account direct materials, direct labor, along with variable and fixed overheads, is included in the product's price.

Variable Costing

An accounting method that includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) in product cost calculations, excluding fixed overhead.