Question 1

The higher the percentage of a firm's total costs that are fixed,the higher the degree of operating leverage and the lower the operating breakeven point.

Accepted Answer

A higher percentage of fixed costs increases the degree of operating leverage, but it raises the operating breakeven point because more revenue is needed to cover the fixed costs before the company can start making a profit.

Question 2

Two firms which have the same operating leverage must also have the same ROA,since operating leverage and ROA both measure the effective utilization of assets by the firm.

Accepted Answer

Operating leverage measures the impact of fixed costs on the firm's profitability, while ROA measures the firm's efficiency in generating profits from its assets. Two firms with the same operating leverage may have different ROAs if one of them is able to generate higher profits from its assets.

Question 3

To determine the amount of additional funds needed,you may subtract the expected increase in liabilities (a source of funds)from the sum of the expected increases in retained earnings and assets (both uses of funds).

Accepted Answer

The statement is incorrect as it suggests that liabilities are a source of funds, whereas in accounting liabilities represent an obligation to pay out funds. Therefore, the correct formula would be: increase in assets - increase in liabilities - increase in retained earnings = additional funds needed.

Question 4

Any firm with a positive growth rate in sales will require some amount of external funding,assuming all existing ratios are to be maintained.

Accepted Answer

The answer of Any firm with a positive growth rate...

Question 5

If EBIT doubles when sales doubles,then the firm's degree of operating leverage must be exactly two.

Accepted Answer

The degree of operating leverage (DOL) measures the percentage change in operating income (EBIT) for a given percentage change in sales. A DOL of exactly two means that EBIT would increase by 2% for every 1% increase in sales. However, if EBIT doubles when sales double, it indicates a proportional (1:1) relationship between sales and EBIT, not a leverage effect of exactly two. The DOL could be different based on other factors affecting costs and sales.

Question 6

Two key objectives of financial planning and control are to avoid cash squeezes and to improve profitability.

Accepted Answer

Financial planning and control aim to ensure that the organization has adequate cash flow to meet its obligations and that it generates profits. By avoiding cash squeezes, the organization can avoid defaulting on its debts or missing important opportunities because it lacks the funds to invest. Improving profitability helps the organization to sustain growth, increase shareholder value, and fund future initiatives. Therefore, both objectives are important for achieving financial stability and success.

Question 7

As a firm's sales grow,its current asset accounts tend to increase.For instance,as sales increase,the firm's purchases increase and its level of accounts payable will increase.Thus,spontaneously generated funds will arise from transaction accounts that increase as sales increase.

Accepted Answer

This statement is true. As the firm experiences an increase in sales, its current asset accounts such as accounts receivable, inventory, and accounts payable will also increase. This increase in transaction accounts generates more spontaneously generated funds.

Question 8

A typical sales forecast,though concerned with future events,will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Accepted Answer

A sales forecast is typically based on recent historical trends and events, as well as forecasts of economic prospects. While it is focused on future events, it utilizes past and present data to make predictions about the future.

Question 9

When a small change in sales results in a large change in operating income,one possible reason is that the firm is employing a relatively high degree of operating leverage.

Accepted Answer

This statement is true. Operating leverage refers to the degree to which a firm uses fixed costs in its operations. When a firm has a high degree of operating leverage, a small change in sales can result in a large change in operating income because the fixed costs remain the same while the variable costs increase with higher sales. On the other hand, when a firm has a low degree of operating leverage, a change in sales will have a smaller effect on operating income because the variable costs will remain relatively constant.

Question 10

One situation where operating breakeven analysis can be valuable is when a firm plans to increase fixed investment in order to lower variable cost,such as labor costs.

Accepted Answer

Operating breakeven analysis can help determine the point at which the fixed investments will break even with the lowered variable costs, allowing a firm to make informed decisions about investing in new equipment or technology that will bring long-term savings.

Question 11

Today,computer simulations models can calculate multiple breakeven charts providing management with an idea of how the firm's breakeven point would change under different assumptions for key variables.

Accepted Answer

This statement is true. With computer simulations, multiple breakeven charts can be created to show different scenarios and how they would affect the breakeven point of the company.

Question 12

An increase in the firm's inventory balance normally will require additional financing unless the increase is matched by an equally large decrease in some other asset account.

Accepted Answer

When inventory increases, it ties up more of the firm's cash and assets. If there is no increase in sales or revenue, and the firm must purchase more inventory on credit, this can lead to higher accounts payable and a need for additional financing to cover the increased expenses. Therefore, an increase in the firm's inventory balance normally requires additional financing unless there is a decrease in some other asset account of equal size.

Question 13

The DOL is an index number that measures the effect of a change in sales price on the operating breakeven point.

Accepted Answer

The Degree of Operating Leverage (DOL) measures the effect of a change in sales volume on operating income, not the effect of a change in sales price on the operating breakeven point.

Question 14

Breakeven analysis can be used to determine how large sales of a new product must be for the firm to achieve profitability,but it is not useful in studying the effects of a general expansion in the firm's operations.

Accepted Answer

Breakeven analysis can be used to determine the sales required to cover costs and make a profit for a specific product or project. However, it may not be useful in studying the impacts of a general expansion of a firm's operations, as it does not consider the potential changes in costs, revenues, and profits associated with such growth. A more comprehensive analysis, such as a financial statement analysis or a feasibility study, may be needed to evaluate the feasibility and potential benefits of a general expansion plan.

Question 15

Errors in the sales forecast can be offset by similar errors in costs and income forecasts.Thus,as long as the errors are not large,sales forecast accuracy is not critical to the firm.

Accepted Answer

While it is true that errors in sales forecasts can be offset by errors in cost and income forecasts, it is always critical for a firm to have as accurate a sales forecast as possible. A small error in sales forecasting can have a large impact on the overall success and profitability of a business.

Question 16

At the firm's operating breakeven point,total revenues and total variable costs are exactly equal.

Accepted Answer

At the firm's operating breakeven point, total revenues are equal to total fixed and variable costs combined, not just variable costs.

Question 17

Other things held constant,if a firm is operating at a profit and then sales increase,the degree of operating leverage will decline.

Accepted Answer

When a firm is operating at a profit and experiences an increase in sales, its fixed costs are spread over a larger number of units, reducing the proportion of fixed costs per unit. This decreases the firm's degree of operating leverage, as the firm becomes less sensitive to changes in sales volume.

Question 18

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales,assuming the firm is operating with a positive profit margin.

Accepted Answer

The answer of The term "spontaneously generated funds" generally refers...

Question 19

Operating costs include variable costs,depreciation and interest charges.

Accepted Answer

Operating costs include variable costs and depreciation but not interest charges. Interest charges are considered non-operating expenses and are not included in operating costs.

Question 20

One limitation of operating breakeven analysis is that variable cost must be assumed constant throughout the analysis in order to completely analyze changes in fixed investment.

Accepted Answer

The answer of One limitation of operating breakeven analysis is...

Quiz 8: Financial Planning and Control