Porterhouse Company Incurs Both Fixed and Variable Production Costs

question 152

Multiple Choice

Porterhouse Company incurs both fixed and variable production costs. Assuming the production is within the relevant range, if volume goes up by 20%, then the total costs would:

• A)increase by 20%.
• B)remain the same.
• C)increase by an amount less than 20%.
• D)decrease by 20%.

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Definitions:

Retained Earnings

The portion of net income that is retained by the corporation rather than distributed to its owners as dividends.

Target Capital Structure

The relative amount of debt, preferred stock, and common equity that the firm desires. The weighted average cost of capital should be based on these target weights.

Cost of Equity

The return a company requires to decide if an investment meets capital return requirements, a crucial part of capital budgeting and often calculated using models like CAPM.

WACC

Weighted Average Cost of Capital; a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. It represents the average rate that a company is expected to pay to finance its assets.