Deck 19: Break-Even Analysis and the Payback Period

Question 1

An upward shift in the fixed cost curve or a downward shift in the total revenue curve will increase the break even level of output.

Answer 1

True

Question 2

The numerical value of the slope of the fixed cost schedule is 1.0.​

Answer 2

False

Question 3

Total revenue equals price times quantity.​

Answer 3

True

Question 4

The total revenue function TR = .5Q implies the price of the product is constant.​

Question 5

The payback method does not consider the time value of money when ranking investments.

Question 6

If a firm has fixed costs of $3,000, the price of its product is $4.00, and the per unit variable costs are $1.00, the break even level of output is 3,000 units.

Question 7

Break even analysis is used to determine the best level of output.

Question 8

If a firm has no sales, it has no costs.​

Question 9

Fixed costs​

A) ​are greater than variable costs
B) ​are paid before variable costs
C) ​do not change with the level of output
D) do not change with the size of the firm​

Question 10

One use for break even analysis is to examine the effect of substituting fixed for variable costs.

Question 11

Linear break‑even analysis assumes that variable costs rise with reductions in output.​

Question 12

If variable costs exceed fixed costs, the firm must be operating at a loss.​

Question 13

The faster an investment recoups it initial costs is an argument to make the investment according to the payback method of selecting investments.​

Question 14

If an investment costs $100,000 and annually generates $25,000, the payback period is 4 years.

Question 15

Break‑even analysis may be used to show​

A) ​the relationship between debt financing and earnings
B) ​the level of sales necessary to avoid losses
C) ​the level of output required to maximize profits
D) the relationship between sales and equity​

Question 16

Break‑even analysis requires knowing the relationship​

A) ​between sales and earnings
B) ​between sales and total costs
C) ​between total revenues and fixed costs
D) ​between sales and assets

Question 17

The straight-line total revenue function suggests the firm may sell additional output without having to lower the price of the product.

Question 18

Break‑even analysis does not indicate the output that maximizes the value of the firm.​

Question 19

Higher interest rates imply faster payback periods.

Question 20

Which of the following is usually a variable expense?​

A) ​salaries
B) rent​
C) wages​
D) insurance premiums​

Question 21

Straight‑line break‑even analysis implies that​
1) fixed costs eventually decline
2) per unit variable cost may initially fall but start to increase with further increases in output
3) per unit variable costs are constant

A)​1 and 2
B)1 and 3​
C)2 and 3​
D)​only 3

Question 22

The payback period is not concerned with​

A) ​earnings
B) cash inflows​
C) the cost of an investment​
D) selecting investments​

Question 23

The payback method fails to consider​
1) the timing of the cash inflow from an investment
2) the cost of an investment
3) the return on alternative investments

A)​1 and 2
B)1 and 3​
C)2 and 3​
D)1, 2, and 3​

Question 24

Variable costs​

A) ​are greater than fixed costs
B) are greater than total costs​
C) are paid after fixed costs​
D) change with the level of output​

Question 25

Break‑even analysis is not concerned with​

A) ​the relationship between financial leverage and risk
B) the relationship between sales and profits​
C) the relationship between total costs and revenues​
D) the relationship between fixed costs and output​

Question 26

A major weakness with the payback method is it failure to​

A) ​consider the cost of an investment
B) consider an investment's cash inflows​
C) employ the firm's cost of funds (capital)​
D) rank investments​

Question 27

The price of a product is $1 a unit. A firm can produce this good with variable costs of $0.50 per unit and total fixed costs of $100.​
a. What is the break‑even level of output?
b. What is the break‑even level of output if fixed costs increase to $180 and variable costs decline to $0.40 per unit?

Question 28

Business risk refers to​
1) use of accelerated depreciation
2) the risk inherent in the nature of the business
3) the sources of the firm's finances

A)​1 and 2
B)1 and 3​
C)2 and 3​
D)only 2​

Question 29

​You want to start a firm whose output you believe you can sell for $25 per unit. The operation will require fixed costs of $10,000, and the variable costs are expected to be $18 a unit. What will be the break-even level of output?

Question 30

To determine the break even level of output, management must know​
1) fixed costs of operation
2) per unit variable costs of output
3) total sales

A)​1 and 2
B)1 and 3​
C)2 and 3​
D)​all three

Question 31

A union contract suggests that labor costs may be​

A) ​variable
B) ​fixed
C) a non‑cash expense​
D) undetermined​

Question 32

Which of the following $1,000 investments would the payback method select?
Cash flows: $$\begin{array} { c r r c } \text { Year } & A & B & C \\1 & \$ 200 & \$ 250 & \$ 400 \\2 & 250 & 250 & 350 \\3 & 300 & 250 & 200 \\4 & 350 & 250 & 150 \\5 & 400 & 250 & 100\end{array}$$

Question 33

​Given the following information, answer the following questions.​
TR = $3Q
TC = $1,500 + $2Q
a. What is the break-even level of output?
b. If the firm sells 1,300 units, what are its earnings or losses?
c. If sales rise to 2,000 units, what are the firm's earnings or losses?
d. If the total cost equation were TC = $2,000 + $1.80Q what happens to the break-even level of output units?