Operations Management Processes and Supply Chains, Krajewski - Exam Preparation Test Bank (Downloadable Doc)

Operations Management, 11e (Krajewski et al.)

Supplement A: Decision Making



A.1 Break-Even Analysis



1) The break-even quantity is the volume at which the total revenue equals total cost.

Answer: TRUE

Reference: Break-Even Analysis

Difficulty: Easy

Keywords: break-even quantity, total revenue, total cost

Learning Outcome: Evaluate major decision-making tools

AACSB: Application of Knowledge



2) The variable cost is the portion of total cost that remains constant regardless of
changes in levels of production.

Answer: FALSE

Reference: Break-Even Analysis

Difficulty: Easy

Keywords: variable cost, level of output, break-even point

Learning Outcome: Evaluate major decision-making tools

AACSB: Application of Knowledge



3) Fixed cost is the portion of the total cost that remains constant regardless of changes in
levels of output.

Answer: TRUE

Reference: Break-Even Analysis

,Difficulty: Moderate

Keywords: fixed cost, level of output, break-even quantity

Learning Outcome: Evaluate major decision-making tools

AACSB: Application of Knowledge



4) Sensitivity analysis is a technique for systematically changing parameters in a model
to determine the effects of such changes.

Answer: TRUE

Reference: Break-Even Analysis

Difficulty: Moderate

Keywords: sensitivity analysis, parameter, break-even quantity

Learning Outcome: Evaluate major decision-making tools

AACSB: Application of Knowledge

,5) Which one of the following statements about break-even analysis for evaluating
products or services is TRUE?

A) The break-even quantity will tend to increase as the variable cost per unit of
production decreases.

B) As sales increase beyond the break-even quantity, total before-tax profits tend to
decrease.

C) A restaurant's opening of downsized facilities with only drive-through service is an
example of lowering fixed costs and the break-even quantity.

D) Increasing the unit selling price has the effect of increasing the break-even quantity.

Answer: C

Reference: Break-Even Analysis

Difficulty: Moderate

Keywords: break-even, fixed cost

Learning Outcome: Evaluate major decision-making tools

AACSB: Application of Knowledge



6) Which one of the following statements about break-even analysis, as we applied it to
evaluating products or services, is BEST?

A) Break-even analysis assumes that the cost function is linear and consists of fixed costs
plus variable costs times volume.

B) The break-even quantity will increase when the change in variable cost per unit is
identical to the change in unit price.

C) Increasing the price, while keeping the variable cost per unit constant, increases the
break-even quantity.

D) Increasing the fixed costs tends to decrease the break-even quantity.

Answer: A

Reference: Break-Even Analysis

Difficulty: Moderate

, Keywords: break-even quantity, fixed cost, variable cost

Learning Outcome: Evaluate major decision-making tools

AACSB: Application of Knowledge



7) Which condition would result in invalidating an application of break-even analysis?

A) The variable cost to produce a unit is less than one percent of the fixed cost to run the
plant.

B) The purchasing department both offers quantity discounts to customers and receives
quantity discounts from suppliers.

C) The variable cost to produce a unit is within one percent of the sale price.

D) The labor to manufacture the item is free.

Answer: B

Reference: Break-Even Analysis

Difficulty: Moderate

Keywords: break-even quantity, volume, cost

Learning Outcome: Evaluate major decision-making tools

AACSB: Application of Knowledge