Question 1

The sales break-even point is defined as:

Accepted Answer

The sales break-even point is the level of sales at which total revenues equal total costs, meaning the firm covers all operating costs, including both fixed and variable costs, resulting in zero profit.

Question 2

Firms with high fixed operating costs:

Accepted Answer

Firms with high fixed operating costs typically have lower variable costs because their primary expenses do not fluctuate with production volume. This structure leads to high operating leverage, where small changes in sales can lead to larger changes in operating income.

Question 3

Given fixed costs of $100,000, variable costs of $7.00 per unit, and a sales price per unit of $10.00, calculate the break-even point in units.

Accepted Answer

C

Question 4

Given fixed costs of $200,000, variable costs of $6.00 per unit, and a sales price per unit of $7.00, calculate the break-even point in units.

Accepted Answer

The answer of Given fixed costs of $200,000, variable costs...

Question 5

Firms with relatively low fixed operating costs and high variable operating costs can best be described as:

Accepted Answer

Firms with low fixed operating costs and high variable operating costs have a low degree of operating leverage because their profits are less sensitive to changes in sales volume. Operating leverage measures how a firm's operating income changes with a change in sales, and lower fixed costs mean less sensitivity.

Question 6

If variable costs = $10.00 per unit; and the selling price = $13.00 per unit, and the break-even point in units = 100,000, calculate the fixed costs.

Accepted Answer

The break-even point in units is calculated as Fixed Costs / (Selling Price per Unit - Variable Cost per Unit). Given the break-even point is 100,000 units, the selling price is $13.00, and the variable cost is $10.00, we can rearrange the formula to solve for Fixed Costs: Fixed Costs = Break-Even Point in Units * (Selling Price per Unit - Variable Cost per Unit) = 100,000 * ($13.00 - $10.00) = 100,000 * $3.00 = $300,000.

Question 7

Degree of operating leverage can best be defined as:

Accepted Answer

The answer of Degree of operating leverage can best be...

Question 8

If sales in 1990 were $100,000 and in 2000 sales were $125,000;If operating income in 1999 were $50,000 and in 2000 were $75,000;If net income in 1999 were $10,000 and in 2000 were projected to
Be $15,000; calculate DOL.

Accepted Answer

The Degree of Operating Leverage (DOL) is calculated as the percentage change in operating income divided by the percentage change in sales. From 1999 to 2000, operating income increased from $50,000 to $75,000, which is a 50% increase. Sales increased from $100,000 in 1990 to $125,000 in 2000, but the relevant sales increase for calculating DOL should be from 1999 to 2000. Since the sales figures for 1999 are not provided, we cannot directly calculate the percentage change in sales for that period. However, assuming the question intends for us to use the provided sales figures as a proxy or made an error in dates, the sales increase from $100,000 to $125,000 is a 25% increase over the decade. This discrepancy in the question's details makes it challenging to calculate DOL accurately without the correct sales figure for 1999. Assuming a direct relationship or a typographical error and using the provided figures, a 50% increase in operating income over a 25% increase in sales would suggest a DOL of 2, but this calculation is based on an assumption due to the lack of specific annual sales data for 1999.

Question 9

Total variable costs are $15,000, sales $50,000, and fixed costs $15,000; calculate DOL.

Accepted Answer

The Degree of Operating Leverage (DOL) is calculated using the formula: DOL = [Q(P-V)] / [Q(P-V) - F], where Q is the quantity sold, P is the price per unit, V is the variable cost per unit, and F is the fixed cost. However, without the quantity sold, we can use the total figures: DOL = (Sales - Variable Costs) / (Sales - Variable Costs - Fixed Costs) = ($50,000 - $15,000) / ($50,000 - $15,000 - $15,000) = $35,000 / $20,000 = 1.75.

Question 10

Whenever fixed costs are greater than zero, DOL is:

Accepted Answer

Degree of Operating Leverage (DOL) is greater than 1 when fixed costs are greater than zero, as it measures the sensitivity of a company's operating income to its sales. Higher fixed costs relative to variable costs result in a higher DOL.

Question 11

Operating leverage has the effect of triggering:

Accepted Answer

Operating leverage refers to the extent to which a company uses fixed costs in its cost structure. A higher degree of operating leverage means that a given percentage change in sales will result in a larger percentage change in EBIT (Earnings Before Interest and Taxes), because fixed costs remain constant as sales change, amplifying the effect on profits.

Question 12

You are provided with the following information: Firm X and Firm Y both sell the same products at the same price; both firms are the same size with identical sales levels; Firm X has lower fixed costs and higher variable operating costs than Firm Y. Which firm has the greatest variability in its operating profits?

Accepted Answer

Firm Y has greater variability in its operating profits because it has higher fixed costs and lower variable costs. This means that changes in sales volume will have a more significant impact on its profits, as its high fixed costs remain constant regardless of sales volume, leading to greater profit variability with changes in sales.

Question 13

If Firm A has a greater variability in operating earnings than Firm B , which firm has the lower DOL?

Accepted Answer

The degree of operating leverage (DOL) is a measure of a company's fixed versus variable costs, not directly a measure of the variability in operating earnings. The information given does not specify the fixed and variable cost structures of Firm A and Firm B, which are necessary to determine their DOL.

Question 14

The total degree of business risk that a company faces is:

Accepted Answer

The total degree of business risk a company faces is influenced by both its fixed costs and the variability of its sales. Fixed costs remain constant regardless of sales volume, affecting the company's break-even point and operating leverage. Variability in sales directly impacts revenue and, consequently, net income, making it a critical factor in business risk.

Question 15

Degree of financial leverage can best be described as:

Accepted Answer

The answer of Degree of financial leverage can best be...

Question 16

Which of the following statements best describes a firm's financial risk? It:

Accepted Answer

Financial risk increases with an increase in long-term debt because it raises the firm's fixed obligations, thereby increasing the risk associated with meeting those obligations.

Question 17

Your firm has a DOL of 1.25 and an EBIT of $500,000. If sales increase by 10%, calculate the percent change in EBIT.

Accepted Answer

The percent change in EBIT is calculated using the Degree of Operating Leverage (DOL) formula: Percent Change in EBIT = DOL * Percent Change in Sales. Here, it's 1.25 * 10% = 12.5%.

Question 18

Calculate DFL.

Accepted Answer

The answer of  Calculate DFL.
...

Question 19

Calculate DFL.

Accepted Answer

The answer of  Calculate DFL.
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Question 20

The financial risk of a firm:

Accepted Answer

Financial risk compounds the effect of business risk by adding the risk associated with the use of financial leverage. This can intensify the volatility of net income because the fixed financial obligations must be met regardless of the company's performance, amplifying the effects of fluctuations in operating income.

Quiz 5: Long-Term Financing Decisions

The sales break-even point is defined as:

Firms with high fixed operating costs:

Given fixed costs of $100,000, variable costs of $7.00 per unit, and a sales price per unit of $10.00, calculate the break-even point in units.

Given fixed costs of $200,000, variable costs of $6.00 per unit, and a sales price per unit of $7.00, calculate the break-even point in units.

Firms with relatively low fixed operating costs and high variable operating costs can best be described as:

If variable costs = $10.00 per unit; and the selling price = $13.00 per unit, and the break-even point in units = 100,000, calculate the fixed costs.

Degree of operating leverage can best be defined as:

If sales in 1990 were $100,000 and in 2000 sales were $125,000;If operating income in 1999 were $50,000 and in 2000 were $75,000;If net income in 1999 were $10,000 and in 2000 were projected to Be $15,000; calculate DOL.

Total variable costs are $15,000, sales $50,000, and fixed costs $15,000; calculate DOL.

Whenever fixed costs are greater than zero, DOL is:

Operating leverage has the effect of triggering:

If Firm A has a greater variability in operating earnings than Firm B , which firm has the lower DOL?

The total degree of business risk that a company faces is:

Degree of financial leverage can best be described as:

Which of the following statements best describes a firm's financial risk? It:

Your firm has a DOL of 1.25 and an EBIT of $500,000. If sales increase by 10%, calculate the percent change in EBIT.

Calculate DFL.

Calculate DFL.

The financial risk of a firm: