Chapter 11

Contribution margin refers to the contribution made toward paying ____ by each additional unit sold .

fixed costs

The basic approach to evaluating cash flow and NPV estimates involves asking ____-if questions .

what

The basic approach to evaluating cash flow and NPV estimates involves asking .

what - if questions

Smith Corporation has variable costs equal to $ 5.10 per unit , fixed costs of $ 11,000 , and total output equal to 240 units . What is the total cost ?

$ 12,224

Broadband , Inc. has estimated preliminary cash flows for a project and found that the NPV for those cash flows is $ 400,000 . The company now plans to perform a scenario analysis on the cash flow and NPV estimates . It will use an NPV of _____ as the base case .

$ 400,000

Which of the following represents the accounting profit break - even point ?

( Fixed costs + Depreciation ) / Contribution margin

Broadband , Inc. has estimated preliminary cash flows for a project and found that the NPV for those cash flows is $ 1,000,000 . The company now plans to perform a scenario , analysis on the cash flow and NPV estimates . It will use an NPV of $ ______ as the base case .

1,000,000

N Corp has a variable cost per unit of $ 1.20 , and the lease payment on the production facility runs $ 4,200 per month . N Corp sells the units at $ 4.60 and has depreciation equal to $ 225 . What is the amount of units that M Corp needs in order to break even with cash ?

1,235

N Corp has a variable cost per unit of $ 1.20 , and the lease payment on the production facility runs $ 4,200 per month . N Corp sells the units at $ 4.60 and has depreciation equal to $ 225 . What is the amount of units that N Corp needs in order to break even ?

1,301

Rank each of the following in order from most important to least important as they pertain to project analysis :

1. cash flow 2. accounting income

What is a sunk cost ?

A cost incurred in the past that is irrelevant to the capital investment decision process .

The ____ is the percentage change in operating cash flow relative to the percentage change in quantity sold .

DOL

In the context of capital budgeting , what does sensitivity analysis do ?

It examines how sensitive a particular NPV calculation is to changes in underlying assumptions .

Which of the following equations correctly relates OCF to sales volume ?

OCF = ( P - v ) x Q - FC

Which of the following is a fixed cost for a garment manufacturing business ?

Rent for the building

Which of the following is an example of a sunk cost ?

Research and development expense incurred in the past

_____ analysis involves estimating the best - case , worst - case , and base - case cash flows and calculating the corresponding NPVs .

Scenario

_____ analysis is the investigation of what happens to NPV when only one variable is changed .

Sensitivity

What is the purpose of accounting profit break - even analysis ?

To determine the level of sales at which profits are equal to zero .

What is the relationship between variable costs and output ?

Total variable costs are directly related to the level of output .

In a graph with output on the x - axis and dollar amount ( for costs and revenues ) on the y - axis , what will be the shapes of variable and fixed costs ?

Variable costs will be upward sloping while fixed costs will be parallel to the x - axis

The geometric average return answers the question ,

What was your average compounded return per year over a particular period ?

Financial break - even is the sales level that results in

an NPV of zero

From a managerial perspective , highly uncertain projects can be dealt with by keeping the degree of operating leverage

as low as possible

To be considered good , projected cash flows should _____ actual cash flows .

be close to

A firm will start generating positive accounting profits

beyond the break - even sales point

A fixed cost is a cost that

remains constant as the level of business activity changes

In a simulation , the average NPV and the spread of NPVs around the average are determined by

repeated random drawings

In a simulation , the average NPV and the spread of NPVs around the average are determined by .

repeated random drawings

Corporate managers care about the break - even point because it indicates the level to which ____ can fall before a project will start losing money .

sales

In simulation analysis , a combination of _____ analysis and _____ analysis is used .

scenario ; sensitivity

When using _____ all of the variables except one are frozen in order to determine how sensitive the NPV estimate is to changes in that particular variable .

sensitivity analysis

When using ______ all of the variables except one are frozen in order to determine how sensitive the NPV estimate is to changes in that particular variable .

sensitivity analysis

The Omega Division of Alpha Corporation has been allocated $ 4 million for capital spending but has identified $ 4.6 million in positive NPV projects . Omega's manager thinks he can convince the company to fund the additional $ 0.6 million dollars because Omega uses ____ rationing to control overall spending .

soft

The situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting is called

soft rationing

When a project breaks even on an accounting basis , the cash flow for that period will equal

the depreciation allowance for that period

Capital rationing exists when a company has identified positive NPV projects but can't find

the necessary financing .

The contribution margin per unit will increase if

the sales price per unit increases while the variable cost per unit decreases

Corporate managers care about the break - even point because it indicates the level

to which sales can fall before a project will start losing money

Which of the following are examples of fixed costs for a car repair shop performing oil changes and other repairs ?

•Insurance for the shop •Salary for the shop manager •Monthly rent for the shop

Which of the following is a fixed cost for a tire manufacturing business ?

•Manager's salary of $ 98,000 / year •Building rent of $ 10,000 / month

Which of the following costs relating to a doctor's office are variable costs ?

•Medical supplies •Lab reports for patients

Which of the following are reasons why NPV is considered a superior capital budgeting technique ?

•NPV considers time value of money •NPV considers all the cash flows

The sales level that results in a zero operating cash flow is called the ____ break - even .

cash

What will the shapes of total revenue and total costs be on a graph that depicts number of units on the x - axis and dollar amount ( revenues and cost ) on the y - axis ?

Both the total revenue and total cost curves will slope upward .

Which of the following is the correct equation for the degree of operating leverage ?

DOL = 1 + FC / OCF

The Accounting Break - Even is the sales level that results in the same project net income as the prior year .

False

Suppose Price per Unit is $ 6 , variable cost per unit is $ 2 , fixed costs are $ 400 and the depreciation allowance per year is $ 500 . The relationship between operating cash flow ( OCF ) and sales volume ( Q ) can be expressed as :

OCF = - 400 + 4 * Q

Which of the following statements is true in the context of comparing accounting profit and present value break - even point ?

Present value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect .

Marginal , or incremental revenue is the change in revenue that occurs when ther is a small change in output .

True

True or false : Ultimately , we are more interested in cash flow than accounting income .

True

True or false : When a business does hard rationing , the firm's DCF analysis breaks down .

True

A positive NPV exists when the market value of a project exceeds its cost . Unfortunately , most of the time the market value of a project

cannot be observed

A contribution margin of $ 35 means that .

each sale of an additional unit will contribute $ 35 toward paying fixed costs

The ____ break - even is the sales level that results in a zero NPV .

financial

The possibility that errors in projected cash flows will lead to incorrect decisions is called _____ or estimation risk

forecasting

Evans Corporation estimated that the cash flows last year from a particular project would be $ 40,000 , but the actual cash flow turned out to be $ 37,500 . Evans Corporation should

not expect cash flow estimates to be exactly right every time

The degree to which a firm or project relies on fixed costs is called the _____ leverage .

operating

According to the video , short - run projected wealth levels calculated using geometric averages are probably

pessimistic

A situation in which a firm has positive NPV projects but cannot find the necessary financing is called capital

rationing

In a competitive market , positive NPV projects are :

uncommon

The _____ cost is equal to the quantity of output times the cost per unit of output .

variable

An accounting break - even point of 1,000 units means that .

when the firm sells 1,000 units , profits will be equal to zero

An accounting break - even point of 2,000 means the firm

will start generating profits if it sells more than 2,000 units .

The cash break - even is the sales level that results in a ____ operating cash flows .

zero

______ are sunk costs because the company will have to pay the cost no matter production or other variables in operations .

Fixed Costs

As a practical matter , it is easier to _____ operating leverage than it is to _____ it .

increase ; decrease

For all practical purposes , it is easier to

increase operating leverage than to decrease it

Which costs are included in the numerator of the accounting profit break - even point equation ?

•Depreciation •Fixed costs

When McDonald's decides to build a new restaurant at a particular location , which of the following competitors might also be tempted to locate new facilities in the same area ?

•Wendy's •Burger King

When we estimate the best - case , worst - case , and base - case cash flows and calculate the corresponding NPVs , we are engaging in

•asking what - if questions •scenario analysis

The possibility that errors in projected cash flows will lead to incorrect decisions is known as

•forecasting risk •estimation risk

Which of the following are examples of variable costs for a car manufacturer ?

•Freight costs •The cost of steel •Labor costs

Which of the following are examples of variable costs for a grocery store ?

•The cost of vegetables •The cost of labor to stock shelves

The situation that occurs when a business cannot raise financing for a project under any circumstances is called

hard rationing .

A firm with higher operating leverage will have ____ fixed costs relative to a firm with low operating leverage .

high