John Is Trying to Decide Whether to Expand His Business

question 19

Multiple Choice

John is trying to decide whether to expand his business or not. If he continues his business as it is, with no expansion, there is a 50 percent chance his revenue will be $100,000 and a 50 percent chance his revenue will be $300,000. If he does expand, it will cost him $150,000, and there is a 30 percent chance his revenue will be $100,000; a 30 percent chance his revenue will be $300,000; and a 40 percent chance his revenue will be $500,000.John decides to expand. Which of the following is true?

• A)John's expected revenue is $50,000 less than it would have been if he didn't expand.
• B)John will earn $120,000 more revenue, but this amount is less than the cost of expansion.
• C)John will earn $120,000 more revenue and therefore made the most profitable decision.
• D)All of these statements are true.

Grasp the significance of capital expenditures and how they impact financial statements.

Familiarize with the accounting treatment and journal entries related to fixed asset transactions.

Recognize the adjustments needed when changes occur in the estimated useful life or residual value of an asset.

Understand the concept and application of depletion in accounting for natural resources.

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Definitions:

Buying Center

A group of individuals within an organization who are responsible for making decisions about significant purchases, evaluating options based on the company's needs.

Premanufacturing Tests

Assessments and evaluations conducted before mass production to ensure product quality and safety.

Business-to-Business

Transactions or activities conducted between businesses rather than between businesses and consumers.

Buying Center

A collection of people in a company who take part in the process of deciding to buy goods or services.