Question 1

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 answer of Mark must buy four new tires for...

Question 2

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 3

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 4

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. Profit margin is the profit earned on each dollar of sales after deducting all expenses. Expense ratio is the ratio of expenses to sales. Fixed coverage ratio measures the number of times that fixed costs are covered by contribution margin.

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 statement is generally true. When a company increases its leverage, it can use the borrowed funds to invest in projects that generate a higher return than the cost of debt, thus increasing the overall return on equity for shareholders. However, this also increases the risk of bankruptcy or default if the company is unable to generate enough cash flow to meet its debt obligations. On the other hand, decreasing leverage typically results in lower returns and lower risk, as the company has less debt to service and is less vulnerable to fluctuations in interest rates or economic conditions.

Question 6

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 is the combination of operating and financial leverage used to magnify the impact of sales changes on earnings per share.

Question 7

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 8

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 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 is used to evaluate the profitability of various sales levels by analyzing the relationship between sales volume, costs, and profits. It helps to determine the level of sales needed to cover all costs and break even, as well as the level of sales needed to generate a desired level of profit. Therefore, option C is the correct answer. The other options, creating profits (A), describing leverage (B), and determining the amount of financing needed by the firm (D) are not the main functions of breakeven analysis.

Question 10

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 11

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 EBIT is zero, which means that the company is generating enough revenue to cover all of its operating expenses but has not yet made a profit. This is the point where the company is neither making a profit nor incurring a loss. Therefore, option D is the correct choice.

Question 12

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

Breakeven point expressed in dollars is the preferred approach for a multiproduct firm as it takes into account the sales mix and allows for a more accurate analysis of the overall profitability. It also helps in setting prices and determining the contribution margin of each product.

Question 13

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 14

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

Question 15

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

Question 16

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 17

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...

Question 18

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

A) Breakeven analysis assumes that the firm's sales revenue and total operating cost functions are linear, meaning that they do not vary with changes in production or sales. This is a limitation since in reality, sales revenue and operating costs can vary in response to changes in demand, production, or other factors. 
B) Semivariable costs, such as rent or utility bills, are costs that have both fixed and variable components. It can be challenging to separate these costs into fixed and variable components for breakeven analysis purposes. 
C) Breakeven analysis tends to have a short-term time horizon and does not account for long-term changes in factors such as competition, technology, or consumer tastes. 
Therefore, all of the above are considered limitations of breakeven analysis.

Question 19

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 20

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

Operating Breakeven Point = (Fixed Costs + Target Net Operating Income) / Contribution Margin per Unit
Contribution Margin per Unit = Sales Price per Unit - Variable Cost per Unit = $5 - $3 = $2
Operating Breakeven Point = ($25,000 + $10,000) / $2 = $17,500
Therefore, the answer is (C) 17,500 units.

Quiz 12: Leverage and Capital Structure

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

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

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

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

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.

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 $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

One function of breakeven analysis is to

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

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

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

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

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 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 $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 .

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

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

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 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) ?