The Management at Sevenglobe Motors Considered the Option to Abandon

question 19

Multiple Choice

The management at Sevenglobe Motors considered the option to abandon when building their new manufacturing plant. The design of the plant allows it to easily be converted to manufacture other types of large machinery. If their new line of cars is poorly received, their plant should be easy to sell to another manufacturing company. In this example, the extra cost of building the plant in such a way that it can easily be converted for other uses resembles:

• A) the premium of a put option on the plant.
• B) the premium of a call option on the plant.
• C) the strike price of a put option on the plant.
• D) the strike price of a call option on the plant.

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Definitions:

Ending Work In Process

Ending work in process refers to the cost of incomplete goods in production at the end of an accounting period, which will be carried forward into the next period.

Conversion Costs

Costs incurred in the process of converting raw materials into finished goods, typically including direct labor and manufacturing overhead.

Conversion Costs

The combined cost of direct labor and manufacturing overhead involved in transforming materials into finished goods.

Equivalent Units

A concept in cost accounting used to calculate the number of complete units that could have been produced given the total amount of raw materials and effort expended.