Question 1

Operating breakeven analysis deals with:

Accepted Answer

Operating breakeven analysis is concerned with determining the level of sales or revenue a company must generate to cover all of its operating expenses and achieve a net income of zero. Therefore, it focuses on the revenues and expenses associated with a firm's normal production and selling operations. Choices A, B, C, and E all refer to other aspects of financial analysis and do not specifically relate to operating breakeven analysis.

Question 2

By definition, a firm's operating breakeven point represents the level of production and sales at which:

Accepted Answer

The operating breakeven point is where total revenue equals total operating costs (fixed and variable), resulting in a net operating income of zero.

Question 3

By definition, a firm's financial breakeven point represents the level of net operating income (NOI) at which its:

Accepted Answer

The financial breakeven point is the level of NOI where the firm's earnings per share (EPS) is zero, meaning the firm covers all its fixed financial costs, including interest and preferred dividends, but does not generate any profit for common shareholders.

Question 4

Assets that cannot be acquired in small increments, but instead must be obtained in large, discrete units, are referred to as _____.

Accepted Answer

Lumpy assets are assets that cannot be acquired in small increments, but instead must be obtained in large, discrete units. Current assets are assets that are expected to be converted to cash within one year, spontaneously generated assets are assets that arise naturally as a result of business operations, excess capacity assets are assets that are not being fully utilized, and long-term assets are assets that have a useful life of more than one year.

Question 5

Everything else equal, a firm can reduce its operating breakeven point by:

Accepted Answer

The operating breakeven point is the level of sales at which a firm's total revenue equals its total expenses. The contribution margin is the amount by which each unit sold contributes to covering the fixed costs and ultimately earning a profit. Therefore, increasing the contribution margin would allow the firm to cover more fixed costs with each unit sold, reducing the operating breakeven point.

Question 6

Financial leverage occurs because of the existence of fixed financial costs such as _____.

Accepted Answer

Financial leverage refers to the use of borrowed funds or other fixed-cost financing arrangements to increase the potential return on an investment. Fixed financial costs include obligations such as preferred dividends that must be paid regardless of the company's profitability, as well as debt service payments, lease payments, and other non-variable expenses. With increased leverage, a company's fixed costs become a larger percentage of its total costs, which can amplify the impact of changes in sales or other revenue-generating activities on the firm's profits.

Question 7

Which of the following is true of the degree of operating leverage (DOL)?

Accepted Answer

The degree of operating leverage (DOL) measures the sensitivity of operating income to changes in sales revenue. A higher DOL indicates that a small change in sales revenue will result in a larger change in operating income. This means that the firm is closer to its operating breakeven point, which is the point at which operating income is zero.

Question 8

When there are economies of scale, a firm's _____ is likely to change as the size of the firm changes.

Accepted Answer

The answer of When there are economies of scale, a...

Question 9

If a firm has a degree of operating leverage (DOL) that is greater than 1.0, then it means that a 1.0 percent change in _____ will cause a change in earnings before interest and taxes (EBIT) that is _____ 1.0 percent.

Accepted Answer

If a firm has a degree of operating leverage greater than 1.0, it means that a 1.0 percent change in sales will cause a change in earnings before interest and taxes (EBIT) that is greater than 1.0 percent. This is because the firm has higher fixed costs compared to variable costs, and an increase in sales leads to a proportionately larger increase in contribution margin, which results in a higher increase in EBIT.

Question 10

The relationship between sales volume and operating profitability is explored in _____.

Accepted Answer

Cost-volume-profit planning explores the relationship between sales volume and operating profitability by analyzing the effects of changes in volume, price, and costs on a company's profits. It helps in determining the breakeven point and the level of sales required to achieve a desired profit. Therefore, option A is the best choice. Financial breakeven analysis and the degree of financial leverage are also related to sales volume and profitability, but they focus more on the impact of financial structure and fixed costs on profits. The projected balance sheet method and economies of scale are not directly related to the relationship between sales volume and operating profitability.

Question 11

Expert Analysts Resources (EAR) has provided you with the following information about three companies you are currently evaluating:
Company Degree of Operating Leverage (DOL) Degree of Financial Leverage (DFL)
Acme 1.5× 6.0×
Apex 3.0× 4.0×
Alps 5.0× 2.0×
_____ would be considered riskiest because _____.

Accepted Answer

Apex has the highest degree of total leverage (DTL), calculated as DOL × DFL, which indicates the highest combined business and financial risk among the three companies.

Question 12

A firm must pay _____ costs even if it produces and sells nothing.

Accepted Answer

Fixed costs are those which do not vary with the level of production or sales. These costs are incurred regardless of the amount of output or sales generated by the business. This means that the firm must pay fixed costs even if it does not produce or sell anything. Examples of fixed costs include rent, salaries, insurance, property taxes, and depreciation.

Question 13

The financial breakeven point is the level of _____ at which earnings per share (EPS) is equal to zero.

Accepted Answer

The answer of The financial breakeven point is the level...

Question 14

Marcus Corporation currently sells 150,000 units a year at a price of $4.00 a unit. Its variable costs are approximately 30% of sales, and its fixed operating costs amount to 50% of revenues at its current output level. Although fixed costs are based on revenues at the current output level, the cost level is fixed. Which of the following is Marcus's degree of operating leverage (DOL) at sales equal to 150,000 units?

Accepted Answer

The degree of operating leverage (DOL) is calculated as 1 + (Fixed Costs / Operating Income). First, calculate the revenues (150,000 units * $4.00 = $600,000). Variable costs are 30% of sales, so they are $180,000. Fixed costs are 50% of revenues, so they are $300,000. Operating income is revenues minus variable and fixed costs: $600,000 - $180,000 - $300,000 = $120,000. DOL = 1 + ($300,000 / $120,000) = 3.5.

Question 15

A firm projects a small increase in sales, but still requires a significant increase in plant and equipment. Which of the following is a reason for such a large financial commitment?

Accepted Answer

An increase in lumpy assets refers to the need for a significant investment in plant and equipment, even though the projected increase in sales is small. This suggests that the company may be undergoing a major expansion or diversification, or that their current assets are outdated and need to be replaced. The other options do not directly relate to the need for a significant financial commitment in plant and equipment.

Question 16

Which of the following statements is true of operating breakeven analysis?

Accepted Answer

Operating breakeven analysis involves determining the point at which revenue from sales equals operating costs, which is the level of production and sales at which the firm does not make a profit or a loss. This analysis is important in determining a company's pricing strategy, as well as its sales and production targets. Option A is incorrect because net operating income is not necessarily equal to one, but rather, it is the point at which it equals zero. Option C is incorrect because financing costs are not considered in operating breakeven analysis. Option D is incorrect because this involves financial breakeven analysis, which considers both operating and financing costs. Option E is incorrect because this involves the analysis of the costs and payments associated with financing, rather than the operating breakeven point.

Question 17

Trident Food Corporation generated the following income statement for the most recent fiscal year: $$\begin{array} { l c } 
\text { Sales revenues } & \$ 150,000 \
\text { Variable cost of sales } & \frac { ( 112,500 ) } { 37,500 } \
\text { Gross profit } & \frac { ( 24,000 ) } { 13,500 } \
\text { Fixed operating costs } & \frac { ( 10,000 ) } { 3,500 } \
\text { Net operating income (EBIT) } & \underline { ( 1,400 ) } \
\text { Interest } & \frac { 2,100 } { \text { Earnings before taxes } }
\end{array}$$
What is the degree of operating leverage for Trident Food?

Accepted Answer

The degree of operating leverage is calculated as the percentage change in EBIT divided by the percentage change in sales. In this case, the percentage change in EBIT is (3,500 - 1,400) / 1,400 = 157.14%. The percentage change in sales is (150,000 - 112,500) / 112,500 = 33.33%. Therefore, the degree of operating leverage is 157.14% / 33.33% = 4.71×.

Question 18

Financial breakeven analysis determines the operating income at which the _____ is equal to zero.

Accepted Answer

The answer of Financial breakeven analysis determines the operating income...

Question 19

Operating breakeven analysis determines:

Accepted Answer

Operating breakeven analysis determines the level of sales needed for a firm to cover its operating costs, thus achieving profitability.

Question 20

Which of the following mathematical expressions is true if the net operating income of a firm is equal to zero?

Accepted Answer

If the net operating income of a firm is equal to zero, it means that the total revenue equals the total expenses. In other words, the sales revenue should be equal to the sum of variable and fixed costs. Therefore, option B is the correct expression. Option A is not necessarily true as the gross profit margin only considers the cost of goods sold, not all expenses. Option C is not correct as total operating costs also include non-production expenses. Option D is not correct as the contribution margin only covers variable costs. Option E is not correct as earnings before interest and tax also involve other expenses such as depreciation.

Quiz 16: Financial Planning and Control