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Entrepreneurship: Starting & Operating a Small Business, 4e (Mariotti)
Chapter 7 Understanding and Managing Start-Up, Fixed, and Variable Costs
1) The bedrock principle of business is that it should ________.
A) please its customers
B) advertise better than its competitors
C) earn a profit
D) continually improve
Learning Object.: 7.1 Calculate the investment required for business start-up.
AACSB Category: Reflective thinking
2) Which two categories below are used for business costs?
A) materials and labor
B) gross and net
C) fixed and variable
D) cost of goods sold and administrative
Learning Object.: 7.1 Calculate the investment required for business start-up.
AACSB Category: Analytical thinking
3) A litmus test for profitability is ________.
A) the business plan
B) the economics of one unit (EOU)
C) the business model
D) net profit
Learning Object.: 7.1 Calculate the investment required for business start-up.
AACSB Category: Analytical thinking
4) There are two categories of variable costs: ________.
A) net variable costs and cost of goods sold
B) gross costs and net variable costs
C) cost of goods sold and other variable costs
D) interest and taxes paid
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
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5) Other variable costs per unit subtracted from Total COGS per unit equals ________.
A) cost of goods sold per unit
B) contribution margin per unit
C) total other variable costs per unit
D) operating margin per unit
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
6) Start-up investment is the one-time expense of opening a business. It is also called ________.
A) entry cost
B) seed capital
C) down payment
D) beginning capital
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
7) A(n) ________ is a model or pattern that serves as an example of how a product would look
and operate if it were manufactured.
A) prototype
B) archetype
C) typology
D) model
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
8) If you sell $2500 worth of product, pay COGS of $800 and other variable costs of $360, what
is your gross profit?
A) $1340
B) $1700
C) $2464
D) $2500
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
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9) The Thomas Register of American Manufacturers lists companies that specialize in creating
________.
A) products
B) prototypes
D) services
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
10) The cost of material used to make a product and cost of labor used to make the product is
associated specifically with a single ________ of sale.
A) unit
B) hour
C) dozen
D) dollar
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
11) Carla sells hot coffee, cider and tea from a sidewalk cart near Wall Street in New York City.
Last month she sold $4,500 worth of product to 1,000 customers. She spent $800 on buying her
beverages in bulk. Her monthly costs are: Utilities = $100, Salary = $2,000, Advertising = $0,
Insurance = $0, Interest = $0, Rent (cart) = $500, Depreciation = $0. What is Carla‘s monthly
cost of goods sold?
A) $800
B) $600
C) $450
D) $100
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Application of knowledge
12) Business start-up cost information can be obtained from ________.
A) advisors
B) quotations from vendors
C) industry data
D) All of the above.
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
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13) You should keep reserves of at least ________.
A) 3 months of fixed operating costs
B) 6 months of fixed operating costs
C) one half of the start-up investment
D) one year of fixed operating costs
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
14) ________ will tell you how long it will take you to earn enough profit to cover your start-up
investment.
A) Return on sales
B) Return on assets
C) Payback
D) ROI
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
15) A critical cost for a beginning business is the seed capital.
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
16) It is wise to keep a reserve equal to one-fourth of the start-up investment.
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
17) Variable costs are expenses that must be paid regardless of whether sales are being
generated.
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
18) What are variable costs? How are they broken down?
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
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19) Explain the concept of payback period.
Learning Object.: 7.2 Assess the variable costs of starting a business.
AACSB Category: Analytical thinking
20) Depreciation is a(n) ________.
A) fixed operating cost
B) variable cost
C) flexible cost
D) administrative cost
Learning Object.: 7.3 Analyze your fixed operating costs and calculate gross profit.
AACSB Category: Analytical thinking
21) Which of the following is not a category of fixed costs?
A) rent
B) advertising
C) capital
D) depreciation
Learning Object.: 7.3 Analyze your fixed operating costs and calculate gross profit.
AACSB Category: Analytical thinking
22) The percentage of value of an asset subtracted each year until the value becomes zero, to
reflect wear and tear on the asset, is called ________.
A) depreciation
B) inventory
C) deductible
D) reduction
Learning Object.: 7.3 Analyze your fixed operating costs and calculate gross profit.
AACSB Category: Analytical thinking
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23) If a business has total gross profit of $14,720 and total operating costs of $11,500, what is its
net profit?
A) $3,000
B) $3,220
C) $1,150
D) $0
Learning Object.: 7.3 Analyze your fixed operating costs and calculate gross profit.
AACSB Category: Application of knowledge
24) If a business sells 5,000 units for a total profit of $200,000, what is its profit per unit?
A) $50
B) $400
C) $40
D) $500
Learning Object.: 7.3 Analyze your fixed operating costs and calculate gross profit.
AACSB Category: Application of knowledge
25) Total Revenue divided by ________ = units sold.
A) selling price
B) profit
C) total operating costs
D) cost
Learning Object.: 7.3 Analyze your fixed operating costs and calculate gross profit.
AACSB Category: Application of knowledge
26) Carla sells hot coffee, cider and tea from a sidewalk cart near Wall Street in New York City.
Last month she sold $4,500 worth of product to 1,000 customers. She spent $800 on buying her
beverages in bulk. Her monthly costs are: Utilities = $100, Salary = $2,000, Advertising = $0,
Insurance = $0, Interest = $0, Rent (cart) = $500, Depreciation = $0. What are Carla’s fixed
costs?
A) $2,000
B) $2,100
C) $2,600
D) $2,700
Learning Object.: 7.3 Analyze your fixed operating costs and calculate gross profit.
AACSB Category: Application of knowledge
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27) Carla sells hot coffee, cider and tea from a sidewalk cart near Wall Street in New York City.
Last month she sold $4,500 worth of product to 1,000 customers. She spent $800 on buying her
beverages in bulk. Her monthly costs are: Utilities = $100, Salary = $2,000, Advertising = $0,
Insurance = $0, Interest = $0, Rent (cart) = $600, Depreciation = $0. Calculate Carla’s average
sale per customer.
A) $4.50
B) $4.00
C) $5.00
D) $0.80
Learning Object.: 7.3 Analyze your fixed operating costs and calculate gross profit.
AACSB Category: Application of knowledge
28) In the phrase I SAID U R + “Other FXs”, UR stands for ________.
A) utilities, rent
B) unknown rates
C) unforeseen revisions
D) unforeseen rates
Learning Object.: 7.3 Analyze your fixed operating costs and calculate gross profit.
AACSB Category: Analytical thinking
29) Fixed operating costs ________.
A) are not included in COGS
B) are not direct costs of creating each product
C) include expenses like rent
D) All of the above.
Learning Object.: 7.3 Analyze your fixed operating costs and calculate gross profit.
AACSB Category: Analytical thinking
30) ________ is what remains when you subtract fixed and variable costs and taxes from
revenues.
A) Operating profit
B) Gross profit
C) Net profit
D) Gross margin
Learning Object.: 7.3 Analyze your fixed operating costs and calculate gross profit.
AACSB Category: Analytical thinking
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31) Fixed operating costs can change over time.
Learning Object.: 7.3 Analyze your fixed operating costs and calculate gross profit.
AACSB Category: Reflective thinking
32) Depreciation is the percentage of value of an asset added each year to reflect wear and tear
on the asset.
Learning Object.: 7.3 Analyze your fixed operating costs and calculate gross profit.
AACSB Category: Analytical thinking
33) Jenny is worried because when she calculates the EOU for her business, the gross profit is
too low. Explain whether or not she could improve it by finding an office with a lower monthly
rent.
Learning Object.: 7.3 Analyze your fixed operating costs and calculate gross profit.
AACSB Category: Analytical thinking
34) Why is it best to pay expenses for your business with a check, not with cash?
A) A check can’t be traced.
B) Cash is easier to lose.
C) A check provides written proof of payment.
D) Paying with a check keeps check printing companies and banks in business.
Learning Object.: 7.4 Select financial record keeping for your business.
AACSB Category: Reflective thinking
35) The systematic recording, reporting, and analysis of the financial transactions of a business is
called ________.
A) accounting
B) reconciliation
C) cost analysis
D) cash flow analysis
Learning Object.: 7.4 Select financial record keeping for your business.
AACSB Category: Analytical thinking
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36) Record keeping for a very small business can be accomplished by a journal and files for
storing ________.
A) records of transactions
B) details of seed capital
C) details of start-up expenses
D) details of marginal costs
Learning Object.: 7.4 Select financial record keeping for your business.
AACSB Category: Analytical thinking
37) ________ is a review of financial and business records to ascertain integrity and compliance
with standards and laws, particularly by the U.S. Internal Revenue Service.
A) Scrutiny
B) Assessment
C) Due diligence
D) Audit
Learning Object.: 7.4 Select financial record keeping for your business.
AACSB Category: Analytical thinking
38) The difference between a receipt and an invoice is that the receipt records ________.
A) sales
B) interest paid
C) purchases
D) credit transactions
Learning Object.: 7.4 Select financial record keeping for your business.
AACSB Category: Analytical thinking
39) Describe how an entrepreneur should protect his/her financial records.
Learning Object.: 7.4 Select financial record keeping for your business.
AACSB Category: Reflective thinking
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40) Give three reasons to keep good records every day.
Learning Object.: 7.4 Select financial record keeping for your business.
AACSB Category: Analytical thinking