Simon Believed That He Might Want to Buy Certain Shares

question 3

Multiple Choice

Simon believed that he might want to buy certain shares from Melinda in the near future.On June 1.He therefore paid her $1000 in exchange for an option to purchase 5000 shares in Acme Inc at $10 each on or before October 1.Which of the following statements is TRUE?

• A)If the market value of the shares immediately dropped to $5 each and stayed there throughout the option period,Simon would be obligated to buy 5000 shares from Melinda at double their actual value.
• B)If the market value of the shares immediately increased to $20 each and stayed there throughout the option period,Melinda might be obligated to sell 5000 shares to Simon at half of their market value.
• C)If the market value of the shares immediately increased to $20 each,Melinda could revoke her offer to sell the shares any time before Simon accepted it.
• D)The option would create enforceable obligations only if and when Simon agreed to buy the shares.
• E)Simon will be entitled to enforce the option only if Melinda cannot find any other potential buyers.

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Definitions:

Overhead Volume Variance

The difference between the budgeted overhead costs based on standard production volumes and the actual overhead costs incurred due to changes in production activity levels.

Standard Overhead Cost

The predetermined rate of allocating fixed and variable overhead expenses to goods or services produced.

Actual Overhead

Actual overhead refers to the real costs incurred for overhead expenses, such as utilities, rent, and administrative costs, during a given period.

Direct Materials Price

The cost per unit of raw materials that are directly traceable to the production of goods.