Would It Be Worth It to Incur a Compensating Balance

question 104

Multiple Choice

Would it be worth it to incur a compensating balance of $15,000 in order to get a 2-percent-lower interest rate on a 1-year, pure discount loan of $1,000,000?

• A) Yes
• B) No
• C) Not enough information is given to determine

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Definitions:

Variable Production Costs

Costs that change in direct proportion to changes in the level of production, such as raw materials and hourly labor.

Fixed Production Costs

Expenses that do not change with the level of production or sales over a short period, such as rent, salaries, and insurance, ensuring stability in production costs despite output variations.

Net Income

The total profit of a company after accounting for all costs and expenses, including taxes, interest, and depreciation.

Direct Materials

Raw materials that are directly traceable and allocable to a finished product in the manufacturing process.