Rom Generators Is in the Process of Preparing a Production

question 102

Multiple Choice

Rom Generators is in the process of preparing a production cost budget for August. Actual costs in July for the production of 60 generators were: $\begin{array}{ll}\text { Materials cost } & \$ 5,200 \\\text { Labor cost } & 2,600 \\\text { Rent } & 1,200 \\\text { Depreciation } & 1,700 \\\text { Other fixed costs } & 4,600\\\text { Total } & \$ 15,300 \\\end{array}$ Materials and labor are the only variable costs. The company has estimated that it can increase sales to 70 generators in August if it changes the selling price of generators to $450 instead of the current $480 per unit. What is expected to occur to the cost per unit given the expected changes?

• A) It will decline because fixed costs do not increase with increases in volume.
• B) It will decline because selling price per unit declines.
• C) It will increase because more units will be produced.
• D) It will increase because fixed costs do not increase with increases in volume.

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Definitions:

Firm-specific Risk

The type of risk that affects a particular company or industry, as opposed to systemic risk, which affects the entire market.

Correlation Coefficient

A statistical measure that describes the extent to which two variables fluctuate together, ranging from -1 (perfect negative correlation) to +1 (perfect positive correlation).

Covariance

A measure of the degree to which two variables move in relation to each other, indicating the direction of their relationship.

Expected Return

The anticipated return on an investment, averaging in the probability of different outcomes.