Question 1

Break-even analysis. Markovian Caviar Sales has discovered that the extent of the demand for its caviar harvest is 20,000 tins per year. If the fixed costs for the new product are $2,300,000 and the variable harvest cost per tin is $35, then what price can Markovian charge per tin if the firm needs to break even on a pretax operating cash flow basis?

Accepted Answer

The formula for calculating the break-even point in units is:

Break-even point (units) = Fixed costs / (Selling price per unit - Variable cost per unit)

Let X be the selling price per tin. Then, we can set up an equation to solve for X:

20,000X = 2,300,000 + 20,000($35)
20,000X = 3,000,000
X = $150 per tin

Therefore, Markovian Caviar Sales can charge $150 per tin to break even on a pretax operating cash flow basis. The correct choice is B.

Question 2

Break-even analysis. ClockWatchers is about to introduce a new employee monitoring tool and has determined that it will charge $100 per unit. The firm must decide whether or not to purchase a high-capacity manufacturing machine. If the high-capacity machine is selected, then the cash fixed costs will be $5,000 per year, with variable costs of $50 per unit and depreciation and amortization expenses of $2,000. Otherwise the fixed costs will be $2,000, with variable costs of $75 per unit and depreciation and amortization expenses of $500. If EBIT Break-even is how the firm evaluates its projects, then above what level of expected sales should ClockWatchers choose the high fixed cost alternative?

Accepted Answer

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Question 3

Calculating operating leverage. SunBucks Tea Supplies had EBITDA of $3,000 and EBIT of $2,750, with fixed cash expenses of $600 last year. What was SunBucks degree of accounting operating leverage?

Accepted Answer

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Question 4

Break-even analysis. A cement contractor has determined that he will maximize pretax operating cash flow buying a large cement truck if he is able to sell more than 500 yards of cement per month. The price of a yard of cement is $60, and the variable costs for a large truck are $20 per yard. The variable costs for a small truck are $40 per yard, and the fixed costs for the small truck are $10,000. What are the fixed costs associated with the large truck?

Accepted Answer

To determine the fixed costs associated with the large truck, we need to perform a break-even analysis.

Let X be the number of yards of cement sold in a month.

For the small truck, the total cost (TC) is: 
TC = 10,000 + 40X

For the large truck, the total cost (TC) is: 
TC = FC + 20X

where FC is the fixed cost associated with the large truck.

To determine the break-even point, we need to set the total cost equations equal to each other:

10,000 + 40X = FC + 20X

Simplifying the equation:

10,000 = FC + 20X - 40X 
10,000 = FC - 20X 
20X = FC - 10,000 
X = (FC - 10,000)/20

We know that the break-even sales volume is 500 yards of cement per month. So:

(FC - 10,000)/20 = 500

Solving for FC:

FC - 10,000 = 20,000 
FC = 30,000

Therefore, the fixed costs associated with the large truck are $30,000.

The best choice is C.

Question 5

Break-even analysis. Poisson Calculators has found that it is indifferent between purchasing a high-capacity vacuum component assembly machine or a lower capacity machine as long as sales are 1,900 units per month. The price of each calculator is $70. The high-capacity machine has cash expenses of $100,000 per month and depreciation and amortization expenses of $30,000 per month, while the alternative has cash expenses of $30,000 per month and depreciation and amortization expenses of $5,000 per month. Under the low-capacity alternative, variable costs per unit are $60. If the firm bases its decisions on the Accounting Operating Profit Break-even, then what is the variable cost per unit under the high-capacity alternative?

Accepted Answer

The variable cost per unit under the high-capacity alternative is $10. This is because the total cost per unit under the high-capacity alternative is $140 ($100,000 cash expenses + $30,000 depreciation and amortization expenses + $10 variable cost per unit) and the total cost per unit under the low-capacity alternative is $95 ($30,000 cash expenses + $5,000 depreciation and amortization expenses + $60 variable cost per unit). Since the firm is indifferent between the two machines at sales of 1,900 units per month, the total cost per unit under both machines must be the same. Therefore, the variable cost per unit under the high-capacity alternative must be $10.

Question 6

Break-even analysis. Monochrome Sun Glasses has found that its pretax operating cash flow basis break-even number of glasses sold is 770,000 pairs. If each pair is sold for $25 and the variable cost per unit is $15, then what is the amount of Monochrome's fixed costs?

Accepted Answer

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Question 7

Calculating operating leverage. Coach K Sneakers, Inc., had EBIT of $1,850 last year with fixed costs equal to $500 (depreciation and amortization not included) and depreciation and amortization equal to $150. What was Coach K's degree of accounting operating leverage?

Accepted Answer

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Question 8

Capital rationing. Mick's Pub's is considering expanding the number of restaurants it owns. If it decides on the expansion, it will invest $2,300,000, and the NPV of the project is $900,000. What is the profitability index of the project?

Accepted Answer

The profitability index (PI) is calculated by dividing the present value of future cash flows by the initial investment.

PI = PV of Future Cash Flows / Initial Investment

In this case, the PV of future cash flows is $900,000, and the initial investment is $2,300,000.

PI = 900,000 / 2,300,000 = 0.39

Therefore, the profitability index is 0.39.

Since the profitability index is less than 1, the project is not expected to be profitable enough to undertake. Therefore, the best choice is not to expand the number of restaurants.

Question 9

Break-even analysis. Binders-For-School, Inc., is in the process of determining whether to purchase a high-capacity machine to make textbooks for the upcoming school year. The high-capacity machine will generate fixed costs of $10,000 per year versus the $2,000 fixed costs of using a low-capacity machine. The variable costs per unit when using the high-capacity machine will be $30. The firm will charge $60 for each textbook and has determined that the high-capacity machine will maximize pretax operating cash flow if sales are greater than 800 books. What is the variable cost per unit under the low-capacity machine scenario?

Accepted Answer

To determine the break-even point, we need to consider when the total revenue equals the total cost. Let x be the number of textbooks sold.
For the high-capacity machine, the total cost is:
Total Cost = $10,000 + $30x 
The total revenue is:
Total Revenue = $60x 
To find the break-even point, we set Total Cost equal to Total Revenue:
$10,000 + $30x = $60x 
Solving for x, we get:
x = 400 
Therefore, if sales are less than 400, the low-capacity machine would be the better option since it has lower fixed costs. If sales are greater than 400, the high-capacity machine should be used.

Now, for the low-capacity machine scenario, let y be the variable cost per unit. The total cost is:
Total Cost = $2,000 + yx 
The total revenue is:
Total Revenue = $60x 
To find the break-even point, we set Total Cost equal to Total Revenue:
$2,000 + yx = $60x 
Substituting x = 400, we get:
$2,000 + 400y = $24,000 
Solving for y, we get:
y = $40 
Therefore, the variable cost per unit under the low-capacity machine scenario is $40.

The best choice(s) is to use the high-capacity machine if sales are greater than 400 textbooks, but use the low-capacity machine if sales are less than or equal to 400 textbooks.

Question 10

Break-even analysis. Yoo Computers is introducing a new game system that promises to never become outdated. Yoo will sell the systems for $200, and it will accrue $130 in variable costs to produce. If cash fixed expenses are $35 million per year and the depreciation and amortization expenses are $7 million per year, then what is the Accounting Operating Profit Break-Even point for Yoo?

Accepted Answer

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Question 11

Break-even analysis. TimeKeepers is about to introduce a new LED clock and has determined that it will charge $30 per clock. The firm must decide whether or not to purchase a high-capacity clock-making machine. If the high-capacity machine is selected, then the fixed costs for the firm will be $5,000 per year, with variable costs of $5 per clock. Otherwise the fixed costs will be $1,000, with variable costs of $15 per clock. Above what level of expected sales should TimeKeepers choose the high fixed cost alternative to maximize pretax operating cash flow?

Accepted Answer

The breakeven point is where the total revenue equals the total cost. For the high fixed cost alternative, the total cost is $5,000 + $5 per clock. For the low fixed cost alternative, the total cost is $1,000 + $15 per clock. The total revenue is $30 per clock. So, the breakeven point for the high fixed cost alternative is 5,000 / (30 - 5) = 400 units.

Question 12

Calculating operating leverage. TurkeyJerkey Dried Meats, Inc., had a degree of accounting operating leverage equal to 1.714 during the most recent period. If the firm's EBITDA was $4,000 and depreciation and amortization was equal to $500, then what was TurkeyJerkey's fixed cash expenses during the same period?

Accepted Answer

Degree of operating leverage (DOL) = % change in EBITDA / % change in sales

1.714 = % change in EBITDA / % change in sales

Assume a 10% decrease in sales (which is a negative change):

1.714 = (EBITDA - (EBITDA - $500)) / (Sales - (Sales * 0.1))

1.714 = $4,500 / ($9,000 - $900)

1.714 = $4,500 / $8,100

% change in EBITDA = 21.05% (rounded)

Now, we can use the formula for DOL again to solve for fixed cash expenses (FC):

DOL = % change in EBITDA / % change in FC

1.714 = 21.05% / % change in FC

% change in FC = 12.28% (rounded)

We know that FC + variable cash expenses (VC) = total cash expenses (TC), and we know that:

EBITDA - TC = net income

$4,000 - TC = net income

We also know that:

VC = (TC - FC) / sales

VC = TC / $9,000 (assuming sales of $9,000)

VC = (TC - FC) / $9,000

Substituting the expressions for VC and net income in the formula for DOL:

DOL = (% change in net income / net income) / (% change in FC / FC)

1.714 = ((net income - (net income - (net income * 0.211))) / net income) / (0.1228)

1.714 = (0.211 / net income) / 0.1228

Solving for net income:

net income = $1,399 (rounded)

Substituting in the expression above:

$4,000 - TC = $1,399

TC = $2,601

Now, we can solve for FC:

FC + VC = TC

FC + (TC / $9,000) = $2,601

FC = $1,999

Therefore, the answer is B) $1,999.

Question 13

Calculating operating leverage. Swan's Bicycle Boats had a degree of accounting operating leverage equal to 1.50 during the most recent period. If the firm's EBITDA was $5,000 and its fixed costs were equal to $1,750, then what was Swan's depreciation and amortization expense during the same period?

Accepted Answer

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Question 14

Break-even analysis. Max's Brakes is introducing a new revolutionary brake-pad for vehicles that will never wear out. Max's will sell the pads for $100 a pair, and they will cost $80 in variable costs to produce. If cash fixed expenses are $1,500 per year and the depreciation and amortization expenses are $600 per year, then what is the Accounting Operating Profit Break-Even point for Max's?

Accepted Answer

The break-even point is calculated by dividing the total fixed costs by the contribution margin per unit. The contribution margin per unit is the selling price minus the variable cost per unit, which is $100 - $80 = $20. The total fixed costs are $1,500 (cash fixed expenses) + $600 (depreciation and amortization) = $2,100. Therefore, the break-even point is $2,100 / $20 = 105 pairs.

Question 15

Capital rationing. You are considering a project that has an initial cost of $1,200,000. If you take the project, it will produce net cash flows of $300,000 per year for the next six years. If the appropriate discount rate for the project is 10 percent, what is the profitability index of the project?

Accepted Answer

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Question 16

Break-even analysis. Bright Light Auto Lamps has found that it is indifferent between purchasing a high-capacity vacuum sealing machine or a lower capacity machine as long as sales are 200 units per month. The price of each sealed beam light is $50. The high-capacity machine has cash expenses of $10,000 per month, while the alternative has cash expenses of $5,000 per month and depreciation and amortization expenses of $2,000 per month. Under high capacity, the variable costs per unit are $10; and they are $40 for the other alternative. If the firm bases its decisions on the Accounting Operating Profit Break-even, then what are the depreciation expenses under the high-capacity alternative?

Accepted Answer

The answer of Break-even analysis. Bright Light Auto Lamps has...

Question 17

Break-even analysis. Binders-For-School, Inc., is in the process of determining whether to purchase a high-capacity machine to make textbooks for the upcoming school year. The high-capacity machine will generate fixed costs of $10,000 per year versus the $2,000 fixed costs of using a low-capacity machine. The variable costs per unit when using the high-capacity machine will be $30. The firm will charge $60 for each textbook and has determined that the high-capacity machine will maximize pretax operating cash flow if sales are greater than 800 books. What is the contribution margin under the low-capacity machine scenario?

Accepted Answer

To find the contribution margin under the low-capacity machine scenario, we need to determine the variable costs per unit. The problem only provides the variable cost per unit for the high-capacity machine, which is $30 per textbook. However, since the total fixed costs are lower for the low-capacity machine, we can assume that the variable costs per unit for the low-capacity machine are also lower.

We know that the high-capacity machine will maximize pretax operating cash flow if sales are greater than 800 books. Therefore, we can assume that the low-capacity machine has a maximum production capacity of 800 books. If we assume that the variable costs per unit for the low-capacity machine are half of the variable costs per unit for the high-capacity machine ($15 per textbook), then we can calculate the contribution margin as follows:

Contribution margin = Selling price per unit - Variable cost per unit
Contribution margin = $60 - $15
Contribution margin = $45

Therefore, the best choice is to use the low-capacity machine because it has a higher contribution margin of $45 compared to the contribution margin of $30 for the high-capacity machine. This choice will result in lower fixed costs and a higher contribution margin, resulting in a higher profit margin.

Question 18

Break-even analysis. IronVerks Ribshack has total fixed costs of $8,500 per month. It sells rib plates for $15 each, and the variable cost of providing each plate is $10. What is the pretax operating cash flow break-even point for IronVerks?

Accepted Answer

To find the break-even point, we need to calculate how many rib plates must be sold to cover the total fixed costs and the variable costs.

Let X be the number of rib plates sold.

Revenue = Price per plate × Number of plates sold
Revenue = $15X

Total Cost = Fixed Cost + Variable Cost per Plate × Number of plates sold
Total Cost = $8,500 + $10X

To break even, revenue must equal total cost:

$15X = $8,500 + $10X

$5X = $8,500

X = 1,700 plates

Therefore, the pretax operating cash flow break-even point for IronVerks is 1,700 plates.

Question 19

Capital rationing. TuleTime Comics is considering a new show that will generate annual cash flows of $100,000 into the infinite future. If the initial outlay for such a production is $1,500,000 and the appropriate discount rate is 6 percent for the cash flows, then what is the profitability index for the project?

Accepted Answer

The profitability index is calculated by dividing the present value of future cash flows by the initial outlay.

To calculate the present value of future cash flows, we can use the perpetuity formula:

PV = Annual cash flow / Discount rate

PV = 100,000 / 0.06 = $1,666,667

Therefore, the profitability index is:

PI = PV of future cash flows / Initial outlay

PI = $1,666,667 / $1,500,000 = 1.11

A profitability index greater than 1 indicates that the project is acceptable. Therefore, the best choice is (C) with a profitability index of 1.11.

Question 20

Capital rationing. The profitability index for a project is 1.18. If the project will produce cash inflows of $60,000 for the next 12 years, what is the initial outlay for the project if the appropriate discount rate is 5 percent? (Round to the nearest $10.)

Accepted Answer

The answer of Capital rationing. The profitability index for a...

Quiz 12: Evaluating Project Economics and Capital Rationing