Chapter 16 Quiz

Progressive Products makes coolers that sell for $250 each; the fixed production costs are $30,000 when 1,000 or fewer coolers are produced; and variable production costs are $200 per cooler. To the nearest dollar, what is the Progressive's current operating breakeven point?

$150,000

Following is the balance sheet of Cyan Inc.: ​ Current assets $ 5,000 Accounts payable $ 1,000 Net fixed assets 10,000 Accruals 1,000 Long-term debt 5,000 Common equity 8,000 Total $15,000 Total $15,000 ​ Cyan currently is operating at full capacity. Next year, the firm expects sales to increase by 50 percent. It also expects to retain $2,000 of next year's earnings to invest in additional fixed assets. What will be Cyan's additional funds needed (AFN) next year?

$4,500

To produce sales of $4,500,000, Azure Inc. uses only 80 percent of its plant capacity. Therefore, Azure can increase its sales to _____ without having to increase its plant and equipment.

$5,625,000

Compuvac Company just completed its initial forecasts of next year's financial statements using the projected balance sheet method. The firm determined that it needs $4 million in new debt, which can be issued at par with a 10 percent annual coupon. Additionally, the firm can sell 500,000 shares of new common equity, which will net $18.10 per share. Next year's expected dividend is $0.48 per share. After accounting for the financing feedbacks associated with raising the required funds, Compuvac expects its taxes to be $160,000 lower than were reported in the initial forecasts. Given this information, what should Compuvac find the change to be in the addition to retained earnings that is reported in the income statement that was initially forecasted after the financing feedbacks are included?

-$480,000

Trident Food Corporation generated the following income statement for the most recent fiscal year: ​ Sales revenues $ 150,000 Variable cost of sales (120,000) Gross profit 30,000 Fixed operating costs (10,000) Net operating income (EBIT) $ 20,000 ​ What is the degree of operating leverage (DOL) for Trident Food?

1.5×

Marcus Corporation currently sells 150,000 units per year at a price of $4.00 a unit. Its variable costs are 30 percent of sales, and its fixed operating costs are $300,000. What is Marcus's degree of operating leverage (DOL) at sales equal to 150,000 units?

3.5×

Trident Food Corporation generated the following income statement for the most recent fiscal year: ​ Sales revenues $ 150,000 Variable cost of sales (120,000) Gross profit 30,000 Fixed operating costs (10,000) Net operating income (EBIT) 20,000 Interest (15,000) Earnings before taxes 5,000 Taxes (40%) (2,000) Net income $ 3,000 ​ What is Trident Food's degree of total leverage (DTL)?

6.0×

Citation Manufacturing produces electronic components that sell for $600 each. The fixed production costs are $720,000 when 30,000 or fewer components are produced, and variable production costs are $510 per component. What is Citation's operating breakeven point?

8,000 components

Which of the following account balances is most likely to change spontaneously with changes in sales?

Accounts payable

Expert Analysts Resources (EAR) has provided you with the following information about three companies you are currently evaluating: ​ Company Degree of Operating Leverage (DOL) Degree of Financial Leverage (DFL) Acme 1.5× 6.0× Apex 3.0× 4.0× Alps 5.0× 2.0× ​ Based on this information, which firm is regarded as having the greatest overall risk?

Apex, because it has the highest degree of total leverage (DTL)

Which of the following mathematical expressions is used to compute the degree of financial leverage (DFL) at a particular level of earnings before interest and taxes (EBIT)? Assume the firm has no preferred stock.

DFL = Earnings before interest and taxes ÷ (Earnings before interest and taxes - Interest)

Which of the following mathematical equations is used to calculate the degree of operating leverage (DOL)? (Δ = change)

DOL = % Δ in net operating income (NOI)/% Δ in sales

Which of the following statements concerning the degree of total leverage (DTL) is correct?

DTL is the percentage change in earnings per share (EPS) that results from a 1 percent change in sales.

Considering each item independently and holding other things constant, which of the following actions would reduce a firm's need for additional capital (additional funds needed, AFN)?

Decrease the firm's days sales outstanding (DSO)

New World Manufacturing has determined that its degree of financial leverage (DFL) is 3.0 when sales equal $750,000, which happens to be its operating breakeven point (i.e., SOpBE = $750,000). At sales equal to $750,000, which of the following conditions must exist for New World Manufacturing? Assume everything else is equal.

Earnings per share (EPS) < 0

Which of the following measures the effect on earnings per share (EPS) of a change in operating income (earnings before interest and taxes)?

Financial leverage

In which of the following situations will Firm A require greater amounts of external funding (additional funds needed, AFN) to meet its forecasted growth than Firm B? Assume the firms are identical in every other way.

Firm A operates at full capacity, whereas Firm B does not.

Which of the following is the first step involved in constructing pro forma financial statements?

Forecasting the income statement

Based on its existing sales, what is the formula for calculating the full-capacity sales of a firm?

Full-capacity sales = Existing sales level ÷ Percent of capacity used to generate existing sales level

Which of the following statements concerning lumpy assets is correct?

If it can only purchase lumpy assets, it is possible that a firm will be required to invest a substantial amount in plant and equipment to attain a small projected increase in sales.

Which of the following statements about funds that a firm generates spontaneously (internally) is correct?

In general, current liabilities that change naturally with changes in sales provide spontaneously generated funds.

By performing a cost-volume-profit analysis, EZ Rentals discovered that its operating breakeven point, QOpBEP, is at sales equal to $180,000. If EZ wants to decrease its operating breakeven point, which of the following actions should be taken? Assume everything else is equal.

Increase the product's contribution margin

______ are assets that must be purchased in large, discrete units.

Lumpy assets

Which of the following actions can be taken to reduce the firm's average collection period?

More aggressively collect delinquent credit accounts

Which of the following account balances generally will not change when sales change?

Notes payable

Which of the following statements about operating breakeven analysis is correct?

Operating breakeven analysis involves determining the point at which sales revenues equal operating costs.

Which of the following mathematical equations represents the operating breakeven point, QOpBEP, for a firm?

Sales = Total variable costs + Total fixed costs

Which of the following statements about the financial planning process is correct?

The decision as to how a firm should raise additional funds needed (AFN) to meet its financial goals depends on the ability of the firm to handle additional debt, conditions in financial markets, and restrictions imposed by existing debt agreements.

Which of the following would be considered part of financing feedbacks in the financial forecasting process?

The effects on the income statement and balance sheet of actions the firm takes to finance forecasted increases in assets.

Which of the following statements concerning the financial breakeven point, EBITFinBEP, is correct?

The financial breakeven point determines the impact of a firm's financing mix on its earnings per share (EPS).

Suppose a firm's degree of financial leverage (DFL) is 1.0. Which of the following statements concerning this firm is correct?

The firm has no long-term debt, preferred stock, or other sources of financing that require fixed payments.

EvenFlo Pipes forecasts a small increase in sales next year. To achieve this growth in sales, however, the firm must purchase an amount of plant and equipment that is more than double the increase in sales. What is the most likely reason EvenFlo must purchase such a large amount of fixed assets?

The firm must purchase lumpy assets to achieve the increase in sales.

Which of the following statements about the degree of operating leverage (DOL) is correct?

The higher the DOL, the closer the firm is to its operating breakeven point.

When forecasting income statements, which of the following is generally a key assumption firms make about their variable operating costs?

Variable operating costs increase at the same rate as sales.

A firm utilizes 75 percent of its plant capacity to produce the current year's sales of $3,000,000. What is the firm's full-capacity sales?

______ are assets that must be purchased in large, discrete units.

If a firm is operating at its full capacity, future increases in sales will require _____.

additional fixed assets

To fully account for financing feedbacks in financial forecasting, all of the steps in the projected balance sheet method must be repeated until _____ equal zero.

additional funds needed (AFN)

A firm's financial breakeven point is defined as the operating income (NOI) at which its _____ is(are) equal to zero.

earnings per share (EPS)

The degree of financial leverage (DFL) is defined as the percentage change in _____ that results from a given percentage change in earnings before interest and taxes (EBIT).

earnings per share (EPS)

By definition, a firm's financial breakeven point represents the level of net operating income (NOI) at which its _____.

earnings per share (EPS) is equal to zero

Operating costs that do not change when production levels change are called ______ costs

fixed

In the financial control phase of the financial planning process, a firm is primarily concerned with _____.

implementing financial plans and dealing with the feedback and the adjustments needed to meet its goals

Everything else equal, a firm can reduce its operating breakeven point by _____.

increasing its product's contribution margin

A firm would conduct operating breakeven analysis primarily to determine the _____.

level of sales a new product must achieve to be profitable

The financial breakeven point is the level of _____ at which earnings per share (EPS) is equal to zero.

net operating income (NOI)

By definition, a firm's operating breakeven point represents the level of production and sales at which its _____.

net operating income is equal to zero

The percentage change in earnings before interest and taxes (EBIT) associated with a given percentage change in sales is known as the degree of _____ leverage.

operating

A firm examines the relationship between its sales volume and its operating profitability by conducting a(n) _____ analysis.

operating breakeven (cost-volume-profit)

Financial leverage occurs because of the existence of fixed financial costs, which include _____.

preferred dividends

Operating breakeven analysis deals with the _____.

revenues and expenses associated with a firm's normal production and selling operations

The ______ forecast is the most important ingredient of the financial forecasting process. If this forecast is inaccurate, the consequences to the forecasting firm can be serious.

sales

If a firm that has a degree of operating leverage (DOL) greater than 1.0 experiences a 1.0 percent change in _____, its earnings before interest and taxes (EBIT) will change by _____1.0 percent.

sales; greater than

Current liabilities accounts that change "naturally" with changes in sales provide funds that tend to change at the same rate as sales. These funds are referred to as ______ funds.

spontaneously generated

To compute the additional funds (AFN) the firm must raise using external financing sources to support a particular level of forecasted operations, the firm should _____.

subtract the funds it expects to generate internally from the funds that are required to attain the forecasted sales

The primary reason the income statement is forecast prior to the balance sheet in the financial planning process is because ______ must be estimated.

the amount of retained earnings the company expects to generate during the year

If a firm currently operates at less than full capacity, it must increase existing plant and equipment only if _____.

the unused capacity of its existing assets is not sufficient to support a forecasted increase in sales

When economies of scale exist, a firm's _____ ratio is likely to decrease if the size of the firm increases substantially.

variable cost of goods sold

In the control phase of the financial planning process, projected financial statements must be evaluated to determine _____.

whether the forecasts meet the firm's financial targets