Chapter 5 Smartbook Questions

small loss potential and small profit potential

Firms with a lower degree of operating leverage will have a Multiple choice question. large loss potential and small profit potential small loss potential and a large profit potential small loss potential and small profit potential large loss potential and a large profit potential

remain the same

Fixed costs Blank______ as the number of units produced increases. Multiple choice question. decrease remain the same do not remain the same increase

non-cash outlay

In accounting and finance, depreciation represents a(n) Multiple choice question. actual expense paid out in cash non-cash outlay cash expense explicit expenditure

how long term debt is used to finance the business

Leverage looks at Multiple choice question. how long term debt is used to finance the business how current assets are financed by payables how much profit is produced by a dollar of sales

combined

Maximum leverage can be achieved through the use of Blank______ leverage. Multiple choice question. operating financial combined

returns

Operating and financial leverage enable a firm to magnify its Blank______. Multiple choice question. dividend. returns. depreciation. operating expenses.

extent to which fixed assets and associated fixed costs are used in the business

Operating leverage is defined as the Multiple choice question. extent to which fixed assets and associated fixed costs are used in the business extent to which total assets and associated fixed costs are used in the business extent to which fixed assets and associated variable costs are used in the business extent to which total assets and associated variable costs are used in the business

conservative

When management expects an economic downturn it may be in the firms best interest to undertake a(n) Blank______ plan. Multiple choice question. conservative leverage liberal aggressive

Break-even analysis

______ can be used to determine how much changes in volume affect costs and profits. Multiple choice question. Break-even analysis Financial leverage analysis Ratio analysis Risk analysis

Operating

______ leverage reflects the extent to which fixed assets and associated fixed costs are utilized in the business. Multiple choice question. Financial Total Combined Operating

factory labor

All of the following are considered fixed costs except Multiple choice question. executive salaries factory labor lease payments property taxes

greater

Assuming that the break-even point has been surpassed, a firm that utilizes a high degree of operating leverage will produce Blank______ profits than a firm that utilizes a lower degree of operating leverage. Multiple choice question. greater lesser

How much will changes in volume affect profit?

Break-even analysis is used to answer which of the following question(s)? Multiple choice question. What is the most efficient level of risk? What is the most efficient level of salaries? How much will changes in volume affect profit? How much will changes in volume affect fixed assets?

short-term

Cash break-even analysis is helpful in analyzing the Blank______ outlook of the firm, particularly when the firm may be in trouble. Multiple choice question. long-term annual-term mid-term short-term

price per unit - variable costs per unit

Contribution margin is defined as Multiple choice question. price per unit - fixed costs per unit fixed costs per unit - total revenue variable costs per unit - total revenue price per unit - variable costs per unit

finance a business.

Debt and equity are methods used to Multiple choice question. finance a business. analyze a firm's profitability. calculate a firm's break-even point. increase a firm's production.

True

Debt financing can be advantageous to a firm, but only up to a point. True false question.

accounting

Depreciation is an ______ flow that represents a noncash accounting entry.

may increase a company's return on equity

Financial leverage Blank______. Multiple choice question. causes a company's return on equity to be equal to its current ratio may increase a company's return on equity may cause a company's return on equity to be lower than its return on assets

False

Financial leverage reflects the amount of fixed costs used by the firm. True false question.

True

Firms that are in financial trouble frequently utilize a cash break-even analysis. True false question.

fixed

Firms that take a conservative approach to the use of operating leverage may increase variable costs in lieu of adding ______ costs.

False

Firms with a high degree of leverage are less dependent on volume than firms with a low degree of leverage. True false question.

2

A degree of combined leverage of 2 indicates that a 1% change in sales will be reflected by a _______ % change in earnings per share. (enter a whole number without the % sign).

100,000

A firm has fixed costs of $80,000, a depreciation expense of $10,000, and a contribution margin of $0.70. So, the break-even point in units on a strictly cash basis is _________ ? (round to the nearest whole number and enter the comma).

fixed costs divided by contribution margin per unit

A simple formula for determining a firm's break-even point is Multiple choice question. fixed costs divided by contribution margin per unit fixed costs divided by variable costs per unit fixed costs divided by total contribution margin fixed costs divided by price per unit

common stockholders driving down the price of the stock being perceived by lenders as a greater financial risk paying higher interest rates

Select all that apply Firms that expand the use of debt in their capital structure run the risk of Multiple select question. common stockholders driving down the price of the stock being perceived by lenders as a greater financial risk paying higher interest rates decreasing the company's sales revenue

economic conditions the firm's competitive position growth of the business management's own risk taking desires

Select all that apply Which factor(s) influence management's decision to follow a more aggressive approach to the firm's leverage or a more conservative approach? Multiple select question. economic conditions the firm's competitive position growth of the business managements decisions are not influenced by outside factors management's own risk taking desires

EPS

Substantial use of debt will magnify Blank______ as volume or operating income increases. Multiple choice question. EBIT sales EPS gross profits

low

Substantial use of debt will place a large burden on the firm at (high or low) _______ levels of profitability.

horizontal or x

The ________ axis of the break-even chart shows the number of units produced and sold.

vertical or y

The ________ axis of the break-even chart shows the revenue and costs.

losses

The area below the break-even point represents Blank______ to the firm. Multiple choice question. losses neither losses nor profits break-even profits

the profitable range of a firm's operations.

The area on the break-even chart above the break-even point represents Multiple choice question. the additional revenue required to reach forecasted sales revenue. the additional cost to be incurred to achieve target sales revenue. the unprofitable range of a firm's operations. the profitable range of a firm's operations.

the point in units where total revenue equals total costs

The break-even point is Multiple choice question. the point in units where total revenue equals total fixed costs the point in units where total revenue equals total costs the point in units where total fixed costs equal total revenue the point in units where total revenue equals variable costs

total revenue = fixed costs + variable costs

The break-even point occurs when the company's Multiple choice question. total revenue = fixed costs total profit = total costs total revenue = variable costs total revenue = fixed costs + variable costs

higher

The closer DOL is computed to the company break-even point, the Blank______ DOL number will be due to a large percentage increase in operating income. Multiple choice question. closer higher lower

40,000

The company has fixed costs of $20,000 and a contribution margin of $0.50, the company's break-even point is ________ units? (round your answer to the nearest whole unit and include the comma).

percent change in earnings per share divided by the percent change in sales

The degree of combined leverage is the Multiple choice question. percent change in operating income divided by the percent change in volume percent change in earnings per share divided by the percent change in sales percent change in sales divided by the percent change in earnings per share percent change in earnings per share divided by the percent change in earnings before interest and taxes

financial leverage

The extent with which debt is utilized in the firm is known as Multiple choice question. combined leverage financial leverage operating leverage break-even leverage

operating leverage

The extent with which fixed costs are used in the operations of the firm is known as Multiple choice question. combined leverage financial leverage operating leverage break-even leverage

debt and equity

The firm can finance the business using Blank______? Multiple choice question. equity only debt only debt and equity debt and fixed costs

volume expands.

The higher a firm's degree of operating leverage, the greater the increase in income as Blank______. Multiple choice question. volume decreases interest expenses increase. interest expenses decrease volume expands.

number of units produced and sold

The horizontal axis of the break-even chart represents the Multiple choice question. number of units produced and sold the costs of units produced revenues per unit produced and sold revenues and costs

total cost curve

The line on the break-even chart that starts with fixed costs at the vertical axis and increases by the amount of the variable costs per additional units produced represents the firm's Blank______? Multiple choice question. total cost curve total revenue curve costs per unit produced and sold revenue per unit produced and sold

$6

The price of a firm's product is $10, variable costs are $4, and fixed costs per unit are $2. What is the contribution margin? Multiple choice question. $6 $10 $8 $4

revenues and costs

The vertical axis of the break-even chart represents the Multiple choice question. number of units produced and sold revenues and costs the number of units produced the number of units sold

True

Total costs are dependent on the company's volume. True false question.

Depreciation

Using cash break-even analysis, what is deducted from fixed costs to arrive at the break-even point? Multiple choice question. Debt Depreciation Employee wages Cash