Test Prep BUSINESS-ENVIRONMENT-AND-CONCEPTS Online Practice Questions and Exam Preparation

Test Prep BUSINESS-ENVIRONMENT-AND-CONCEPTS Online Questions & Answers

• Question 131:

  All of the following are complementary goods, except:

  A. Margarine and butter.
  B. Gas and motor oil.
  C. Cameras and rolls of film.
  D. VCRs and video cassettes.
  A. Margarine and butter.

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  Choice "a" is correct. Margarine and butter are substitute goods. If the price of one goes up, demand for the substitute increases. Choices "b", "c", and "d" are incorrect. They are complements. Two goods are complements if they are used together or their demand curves move together (breakfast cereal and milk, e.g., or tennis balls and tennis racquets). Thus, if the price of one complement goes up, demand for the other good goes down.

• Question 132:

  Stagflation refers to:

  A. A combination of rising unemployment and rising real GDP.
  B. A combination of rising unemployment and a rising price level.
  C. High inflation rates.
  D. High unemployment rates.
  B. A combination of rising unemployment and a rising price level.

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  Choice "b" is correct. Stagflation occurs when the economy suffers a recession that is characterized by falling output, rising unemployment, and a rising price level.

  Choice "a" is incorrect. Real GDP is falling during stagflation, not rising.

  Choice "c" is incorrect. High inflation rates is just one aspect of stagflation; the other is falling output and rising unemployment. Choice "d" is incorrect. High unemployment rates are just one aspect of stagflation; the other is a rising overall

  price level (high inflation).

• Question 133:

  In order to increase production capacity, Gunning Industries is considering replacing an existing production machine with a new technologically improved machine effective January 1, 1997. The following information is being considered by Gunning Industries.

  A. $242,624
  B. $303,280
  C. $363,936
  D. $454,920

  D. $454,920

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  Choice "d" is correct. $454,920 discounted net-of-tax contribution margin.

  

  Choices "a", "b", and "c" are incorrect based on the above Explanation.

• Question 134:

  Minon, Inc. purchased a long-term asset on the last day of the current year. What are the effects of this purchase on return on investment and residual income?

  

  A. Option A
  B. Option B
  C. Option C
  D. Option D
  B. Option B

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  Choice "b" is correct. The addition of an asset at year end serves to reduce both return on investment and residual income. The addition of an asset increases then denominator in the ROI computation and increases the threshold earnings required using the residual income approach. Both measures would suffer as a result of addition of assets. See illustration below:

  

  The purchase of the additional asset reduces ROI from 10% to 8% and produces negative residual income. Choices "a", "c", and "d" are incorrect, per the above illustration.

• Question 135:

  Food Corp. owned a restaurant called The Ambers. The corporation president, T.J. Jones, hired a contractor to make repairs at the restaurant, signing the contract, "T.J. Jones for The Ambers." Two invoices for restaurant repairs were paid by Food Corp. with corporate checks. Upon presenting the final invoice, the contractor was told that it would not be paiD. The contractor sued Food Corp. Which of the following statements is correct regarding the liability of Food Corp.?

  A. It is not liable because Jones is liable.
  B. It is not liable because the corporation was an undisclosed principal.
  C. It is liable because Jones is not liable.
  D. It is liable because Jones had authority to make the contract.
  D. It is liable because Jones had authority to make the contract.

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  Choice "d" is correct. Where an agent enters into a contract on behalf of a principal and discloses the existence and identity of the principal and acts with authority, the principal is liable and the agent is not liable. Here, Jones signed the

  contract with an indication that he was signing for the corporation. The president of a corporation is an agent of the corporation and has apparent authority to enter contracts that appear to be within the ordinary scope of the corporation's

  business. The restaurant repairs here appear to be with the scope of Food Corp.'s business. Therefore, Food Corp. will be bound because Jones had at least apparent authority.

  Choice "a" is incorrect, per the rule stated above.

  Choice "b" is incorrect. The president signed as acting on behalf of the corporation, thus disclosing the principal.

  Choice "c" is incorrect, per the rule stated above.

• Question 136:

  Which of the following is not considered a factor that increases the bargaining power of the customer?

  A. Much information is available to the customer to compare and contrast features of all products on the market.
  B. One group of customers makes up a large volume of the firm's business.
  C. Buyers have low switching costs of changing products.
  D. The firm is unable to change suppliers easily.
  D. The firm is unable to change suppliers easily.

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  Choice "d" is correct. When a firm is unable to change suppliers easily, that is a factor that increases the bargaining power of the suppliers. Choices "a", "b", and "c" are incorrect because they all are factors that increase the bargaining power

  of the customer, which are:

  ?Customers make up a large volume of a firm's business.

  ?There is much information available to customers.

  ?The buyers have low switching costs.

  ?There are a high number of alternate suppliers.

• Question 137:

  A company enters into an agreement with a firm who will factor the company's accounts receivable. The factor agrees to buy the company's receivables, which average $100,000 per month and have an average collection period of 30 days.

  The factor will advance up to 80 percent of the face value of receivables at an annual rate of 10 percent and charge a fee of 2 percent on all receivables purchased. The controller of the company estimates that the company would save

  $18,000 in collection expenses over the year.

  Fees and interest are not deducted in advance. Assuming a 360-day year, what is the annual cost of financing?

  A. 12.0 percent.
  B. 14.0 percent.
  C. 16.0 percent.
  D. 17.5 percent.
  D. 17.5 percent.

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  Choice "d" is correct. 17.5% annual cost of financing.

  

• Question 138:

  One approach to measuring divisional performance is return on investment. Return on investment is expressed as operating income:

  A. Divided by the current year's capital expenditures plus cost of capital.
  B. Divided by fixed assets.
  C. Divided by current assets.
  D. Divided by total assets.
  D. Divided by total assets.

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  Choice "d" is correct. Return on investment is operating income divided by total assets.

  Choice "a" is incorrect. Current year's capital expenditures plus cost of capital would be a meaningless denominator.

  Choice "b" is incorrect. This omits the current assets employed by the division.

  Choice "c" is incorrect. This omits fixed assets.

• Question 139:

  The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the firm's maturing obligations is the policy that finances: A. Fluctuating current assets with long-term debt.

  B. Permanent current assets with long-term debt.
  C. Permanent current assets with short-term debt.
  D. Fluctuating current assets with short-term debt.
  C. Permanent current assets with short-term debt.

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  Choice "c" is correct. The working capital financing policy that finances permanent current assets with short-term debt subjects the firm to the greatest risk of being unable to meet the firm's maturing obligations. Choices "a" and "b" are incorrect because the use of long-term debt financing produces the smallest risk of being unable to meet maturing obligations. Choice "d" is incorrect because, although financing fluctuating current assets with short-term debt exposes the firm to some risk, it is not the greatest or the smallest.

• Question 140:

  A firm with a higher degree of operating leverage when compared to the industry average implies that the:

  A. Firm has higher variable costs.
  B. Firm's profits are more sensitive to changes in sales volume.
  C. Firm is more profitable.
  D. Firm uses a significant amount of debt financing.
  B. Firm's profits are more sensitive to changes in sales volume.

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  Rule: Operating leverage is the presence of fixed costs in operations, which allows a small change in sales to produce a larger relative change in profits. Choice "b" is correct. A firm with a higher degree of operating leverage when compared

  to the industry average implies that the firm's profits are more sensitive to changes in sales volume.

  Choice "a" is incorrect. Higher variable costs imply a lower degree of operating leverage.

  Choice "c" is incorrect. Profits will depend upon sales.

  Choice "d" is incorrect. A firm using a significant amount of debt financing has a higher degree of "financial leverage."