Question 1

The firm's operating breakeven point is the point at which
A) total operating costs equal total fixed costs.
B) total operating costs are zero.
C) EBIT is less than sales.
D) EBIT is zero.

Accepted Answer

The operating breakeven point is the point at which a firm's EBIT is zero, meaning their total revenue equals their total operating costs. Choice A is not correct, as total fixed costs are already factored into the calculation of operating breakeven point. Choice B is not correct, as it is impossible for total operating costs to be zero, as there will always be some form of cost associated with running a business. Choice C is not correct, as EBIT being less than sales would indicate a loss, not the operating breakeven point.

Question 2

Tony's Beach T-Shirts has fixed annual operating costs of $75,000. Tony retails his T-shirts for $14.99 each and the variable cost per T-shirt is $4.99. Based on this information, the breakeven sales level in dollars is
A) $125,495.
B) $112,425.
C) $108,995.
D) none of the above.

Accepted Answer

The answer of Tony's Beach T-Shirts has fixed annual operating...

Question 3

A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating breakeven point in units is ________ and its breakeven point in dollars is ________.
A) 250; $ 6,250
B) 400; $10,000
C) 667; $16,675
D) 1,000; $25,000

Accepted Answer

The answer of A firm has fixed operating costs of...

Question 4

Tony's Beach T-Shirts has fixed annual operating costs of $75,000. Tony retails his T-shirts for $14.99 each and the variable cost per T-shirt is $4.99. Based on this information, the breakeven sales level in units is
A) 7,500.
B) 15,030.
C) 5,003.
D) none of the above.

Accepted Answer

The breakeven sales level in units is calculated by dividing the fixed annual operating costs by the contribution margin per unit. The contribution margin per unit is the difference between the selling price per unit and the variable cost per unit. In this case, the fixed annual operating costs are $75,000, the selling price per unit is $14.99, and the variable cost per unit is $4.99. Therefore, the contribution margin per unit is $14.99 - $4.99 = $10.00. Dividing the fixed annual operating costs by the contribution margin per unit gives us the breakeven sales level in units, which is $75,000 / $10.00 = 7,500 units.

Question 5

Generally, increases in leverage result in increased return and risk, whereas decreases in leverage result in decreased return and risk.

Accepted Answer

This is generally true, as increasing leverage amplifies both gains and losses, leading to higher returns and risk. However, reducing leverage can lead to lower returns and risk as it reduces the potential gains and losses.

Question 6

Which one of the following is considered a limitation of breakeven analysis?
A) It assumes that the firm faces linear, or nonvarying, sales revenue and total operating cost functions.
B) It is difficult to break semivariable costs into fixed and variable components.
C) It has a short-term time horizon.
D) All of the above.

Accepted Answer

All of the given options are considered limitations of breakeven analysis. It assumes that the firm's sales revenue and total operating cost functions are linear, which may not hold true in reality. It is also challenging to separate semivariable costs into fixed and variable components accurately. Additionally, breakeven analysis has a short-term time horizon as it assumes that there are no changes in the market and the cost structure.

Question 7

Noncash charges such as depreciation and amortization ________ the firm's breakeven point.
A) do not affect
B) overstate
C) understate
D) decrease

Accepted Answer

The answer of Noncash charges such as depreciation and amortization...

Question 8

A major assumption of breakeven analysis and one which causes severe limitations in its use is that
A) fixed costs really are fixed.
B) total revenue is nonlinear.
C) revenues and operating costs are linear.
D) all costs are really semi-variable.

Accepted Answer

Breakeven analysis assumes that revenues and operating costs are linear, meaning they change at a constant rate relative to production and sales levels. This simplification can limit the analysis's accuracy in real-world scenarios where costs and revenues may not behave linearly.

Question 9

One function of breakeven analysis is to
A) create profits.
B) describe leverage.
C) evaluate the profitability of various sales levels.
D) determine the amount of financing needed by the firm.

Accepted Answer

Breakeven analysis helps in evaluating the level of sales at which the company neither makes a profit nor incurs a loss. By analyzing the breakeven point, a company can determine the sales volume required to cover all its expenses and make a profit. This analysis helps in making decisions such as pricing strategy, determining the minimum amount of sales required to stay in business, and evaluating the profitability of different sales levels. Breakeven analysis does not determine profits or financing needs, nor does it describe leverage.

Question 10

A firm has fixed operating costs of $150,000, total sales of $1,500,000, and total variable costs of $1,275,000. The firm's operating breakeven point in dollars is
A) $150,000.
B) $176,471.
C) $1,000,000.
D) $1,425,000.

Accepted Answer

The operating breakeven point can be calculated using the formula:

Breakeven point = Fixed costs / (1 - (Variable costs / Sales))

Substituting the given values, we get:

Breakeven point = $150,000 / (1 - ($1,275,000 / $1,500,000))
Breakeven point = $150,000 / (1 - 0.85)
Breakeven point = $150,000 / 0.15
Breakeven point = $1,000,000

Therefore, the operating breakeven point in dollars is $1,000,000. Option C is the correct answer.

Question 11

A firm has fixed operating costs of $525,000, of which $125,000 is depreciation expense. The firm's sales price per unit is $35 and its variable cost per unit is $22.50. The firm's cash operating breakeven point in units is
A) 23,330.
B) 32,000.
C) 42,000.
D) 52,000.

Accepted Answer

Cash operating breakeven point = (Fixed costs - Depreciation) / (Sales price per unit - Variable cost per unit)
= ($525,000 - $125,000) / ($35 - $22.50)
= $400,000 / $12.50
= 32,000 units.

Question 12

Mark must buy four new tires for his car. He is considering buying tires that are $25 a piece more than his regular brand, because the higher priced tires are supposed to increase his miles per gallon by 20%. If the tires are good for 48,000 miles and Mark drives an average of 1000 miles per month, gas costs $2.50 per gallon over the next 4 years, and Mark's car gets 30 miles to the gallon now (on the old tires), should Mark purchase the more expensive tires?
A) Yes, because Mark will save about $660 dollars in gas over the four years but the new tires will only be $100 more.
B) Yes, because Mark will save about $560 dollars in gas over the four years but the new tires will only be $100 more.
C) No, because Mark will only save about $60 dollars in gas over the four years but the new tires will only be $100 more.
D) There is not enough information given in the problem to make the decision.

Accepted Answer

The new tires increase fuel efficiency by 20%, so Mark's car will get 36 miles per gallon. Over 48,000 miles, he will use 1,333.33 gallons with the new tires, compared to 1,600 gallons with the old tires. This saves 266.67 gallons, which at $2.50 per gallon saves $666.67. The new tires cost $100 more, so the net savings is about $566.67, making option A correct.

Question 13

The relationship between operating and financial leverage is additive rather than multiplicative.

Accepted Answer

The relationship between operating and financial leverage is multiplicative, not additive, because the total leverage effect on a firm's earnings per share (EPS) is the product of operating leverage (affecting operating income) and financial leverage (affecting net income).

Question 14

The per dollar contribution toward fixed operating costs and profits provided by each dollar of sales is the
A) profit margin.
B) contribution margin.
C) expense ratio.
D) fixed coverage ratio.

Accepted Answer

The per dollar contribution toward fixed operating costs and profits provided by each dollar of sales is known as contribution margin. It is calculated by subtracting variable costs from sales revenue. The contribution margin ratio helps in determining the break-even point and the volume of sales needed to achieve a desired level of profit. Therefore, option B is the correct answer. A) Profit margin is the percentage of sales revenue that represents profit after all expenses have been deducted. C) Expense ratio refers to the percentage of revenue used to cover operatingexpenses. D) Fixed coverage ratio measures the ability of the company to cover its fixed expenses with its earnings.

Question 15

The preferred approach to breakeven analysis for the multiproduct firm is the
A) breakeven point expressed in units.
B) breakeven point expressed in dollars.
C) cash breakeven point.
D) overall breakeven point.

Accepted Answer

Expressing the breakeven point in dollars takes into account the varying prices and profit margins of the different products, making it the preferred approach for a multiproduct firm. It allows for a more accurate representation of the point at which the firm is covering all of its costs and generating profit.

Question 16

A firm has fixed operating costs of $25,000, a per unit sales price of $5, and a variable cost per unit of $3. What is its operating breakeven point if it desires net operating income of $10,000, not $0 (zero)?
A) 12,500 units
B) 15,000 units
C) 17,500 units
D) 25,000 units

Accepted Answer

The operating breakeven point can be calculated using the formula:

Breakeven point (in units) = [Fixed costs + Net operating income] / Contribution margin per unit

Here, the fixed costs are $25,000, the net operating income desired is $10,000, and the contribution margin per unit can be calculated as:

Contribution margin per unit = Sales price per unit - Variable cost per unit 
= $5 - $3 
= $2

Substituting these values in the formula, we get:

Breakeven point (in units) = [$25,000 + $10,000] / $2 
= 17,500 units

Therefore, the correct answer is C) 17,500 units.

Question 17

A firm has fixed operating costs of $253,750, a sales price per unit of $100, and a variable cost per unit of $65. The firm's operating breakeven point in dollars is
A) $725,000.
B) $700,000.
C) $906,250.
D) $390,385.

Accepted Answer

The answer of A firm has fixed operating costs of...

Question 18

Total leverage can be defined as the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on the firm's earnings per share.

Accepted Answer

Total leverage refers to the use of both operating and financial fixed costs to increase the impact of sales changes on a company's earnings per share. This means that a company can maximize its earnings by effectively managing both types of fixed costs to create leverage.

Question 19

If a firm's fixed financial costs decrease, the firm's operating breakeven point will
A) decrease.
B) increase.
C) remain unchanged.
D) change in an undetermined direction.

Accepted Answer

The answer of If a firm's fixed financial costs decrease,...

Question 20

Operating leverage results from the existence of operating costs in the firm's income stream.

Accepted Answer

The answer of Operating leverage results from the existence of...

Quiz 13: Leverage and Capital Structure

The firm's operating breakeven point is the point at which

Tony's Beach T-Shirts has fixed annual operating costs of $75,000. Tony retails his T-shirts for $14.99 each and the variable cost per T-shirt is $4.99. Based on this information, the breakeven sales level in dollars is

A firm has fixed operating costs of $10,000, the sale price per unit of its product is $25, and its variable cost per unit is $15. The firm's operating breakeven point in units is and its breakeven point in dollars is .

Tony's Beach T-Shirts has fixed annual operating costs of $75,000. Tony retails his T-shirts for $14.99 each and the variable cost per T-shirt is $4.99. Based on this information, the breakeven sales level in units is

Generally, increases in leverage result in increased return and risk, whereas decreases in leverage result in decreased return and risk.

Which one of the following is considered a limitation of breakeven analysis?

Noncash charges such as depreciation and amortization ________ the firm's breakeven point.

A major assumption of breakeven analysis and one which causes severe limitations in its use is that

One function of breakeven analysis is to

A firm has fixed operating costs of $150,000, total sales of $1,500,000, and total variable costs of $1,275,000. The firm's operating breakeven point in dollars is

A firm has fixed operating costs of $525,000, of which $125,000 is depreciation expense. The firm's sales price per unit is $35 and its variable cost per unit is $22.50. The firm's cash operating breakeven point in units is

The relationship between operating and financial leverage is additive rather than multiplicative.

The per dollar contribution toward fixed operating costs and profits provided by each dollar of sales is the

The preferred approach to breakeven analysis for the multiproduct firm is the

A firm has fixed operating costs of $25,000, a per unit sales price of $5, and a variable cost per unit of $3. What is its operating breakeven point if it desires net operating income of $10,000, not $0 (zero) ?

A firm has fixed operating costs of $253,750, a sales price per unit of $100, and a variable cost per unit of $65. The firm's operating breakeven point in dollars is

Total leverage can be defined as the potential use of fixed costs, both operating and financial, to magnify the effect of changes in sales on the firm's earnings per share.

If a firm's fixed financial costs decrease, the firm's operating breakeven point will

Operating leverage results from the existence of operating costs in the firm's income stream.