Suppose That Silvia's Dance Studio Uses Both Labor and Capital

question 24

Multiple Choice

Suppose that Silvia's Dance Studio uses both labor and capital to teach dance lessons.Given her current mix of labor and capital,the cost efficiency of labor is 1 dance lesson per dollar,and the cost efficiency of capital is 5 dance lessons per dollar.Silvia should

• A)Hire less labor and use more capital.
• B)Use only capital to produce the lessons.
• C)Use less capital and hire more labor.
• D)Use only labor to produce the lessons.

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Definitions:

Capital Lease

A lease classified as a purchase by the lessee, whereby the lessee records the leased asset as an owned asset on the balance sheet.

Bargain Purchase Option

A lease agreement provision allowing the lessee to purchase the leased asset at a price significantly lower than its expected fair market value at the end of the lease term.

Long-term Liability

A long-term liability is a financial obligation of a company that is due beyond one year, such as bonds payable, long-term leases, and pension obligations.

Capital Lease Obligations

Long-term lease agreements that are recorded as assets on a company's balance sheet, effectively treating the lease as a purchase of the asset.