A Firm Is Reorganising and Reclassifying Its Cost Structure

question 48

Multiple Choice

A firm is reorganising and reclassifying its cost structure. The firm previously classified the item 'glue and nails' as indirect material. The firm is considering now tracing this cost directly to products and treating 'glue and nails' as direct material. What is the effect on the break-even point (if any) of that change, provided all other items remain unchanged?

• A) The break-even point will not change.
• B) The break-even point will increase.
• C) The break-even point will decrease.
• D) The break-even point will change but without actual figures, it is impossible to say in what direction the change will be.

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Definitions:

Long Call

An options trading strategy where the investor purchases a call option with the belief that the underlying asset's price will increase.

Short Put

An options strategy where an investor sells a put option with the expectation that the market price of the underlying asset will rise.

Premium

An amount paid in excess of the nominal value or in addition to the standard cost, often associated with insurance policies or bonds.

Strip

A strategy in bond investing or a derivative trading term where a bond's interest payments and principal repayments are separated and sold as individual zero-coupon securities.