Ch. 5

Which of the following questions does break-even analysis attempt to address?

-How much do changes in volume affect costs and profits? -At what point does the firm have zero profit? -What is the most efficient level of fixed assets to employ?

Which of the following statements regarding financial leverage are true.

-financial leverage reflects the amount of debt used in the capital structure of the firm. -financial leverage primarily affects the right side of the balance sheet. -financial leverage determines how the operation is to be financed.

If a firm has a sales price per unit of $6.00, a variable cost per unit of $4.00, and a break-even point of 40,000 units, fixed costs are equal to _____.

40,000=FC/($6 − $4) FC=$80,000

If a firm has fixed costs of $30,000, a variable cost per unit of $.75, and a break-even point of 5,000 units, the sales price per unit is _____.

BE=FC/(P − VC) 5,000=$30,000/(P − $0.75) P=$6.75

If a firm has fixed costs of $60,000, a sales price of $7.00 per unit, and a break-even point of 25,000 units, the variable cost per unit is _____.

BE=Fixed costs/Price − Variable cost per unit 25,000=60,000/(7 − VC) VC=$4.60 per unit

Refer to the table. The degree of combined leverage (DCL) is _____.

DCL = DOL × DFL DCL = 1.80 × 1.25 = 2.25 Or DCL=S − TVC/EBIT − I $90,000/$40,000= 2.25

Refer to the table. The degree of financial leverage (DFL) is _____.

DFL=EBIT/EBIT − I $50,000/$50,000 − $10,000= 1.25x

Refer to the table. The degree of financial leverage is _____.

DFL=EBIT/EBIT − I DFL=$500,000/$500,000 − $75,000 =1.18

Cash break-even analysis

is helpful in analyzing the short-term outlook of the firm, particularly when it is in trouble financially.

Firms with a high degree of operating leverage are

trading off higher fixed costs for lower per-unit variable costs.