Finance (the last chapter)

45. Which of the following statements are correct concerning the accounting break-even point? I. The net income is equal to zero at the accounting break-even point. II. The net present value is equal to zero at the accounting break-even point. III. The quantity sold at the accounting break-even point is equal to the total fixed costs plus depreciation divided by the contribution margin. IV. The quantity sold at the accounting break-even point is equal to the total fixed costs divided by the contribution margin. a. I and III only b. I and IV only c. II and III only d. II and IV only e.I, II, and IV only

a. I and III only

36. Which of the following statements concerning variable costs is (are) correct? I. Variable costs minus fixed costs equal marginal costs. II. Variable costs are equal to zero when production is equal to zero. III. An increase in variable costs increases the operating cash flow. IV. Variable costs can be ascertained with certainty when evaluating a proposed project. a. II only b. IV only c. I and III only d. II and IV only e. I and II only

a. II only

26. When you apply the highest sales price and the lowest costs in a project analysis, you are constructing: a. a best case scenario. b. a base case scenario. c. a worst case scenario. d. a sensitivity to fixed costs. e. a sensitivity to sales quantity.

a. a best case scenario.

40. Which one of the following is a fixed cost in the short-run? a. a lease on a copier b. the cost of a machine operator c. the cost of raw materials d. the cost of building maintenance e. employee benefits for shop workers

a. a lease on a copier

21. Forecasting risk emphasizes the point that the soundness of any management decision based on the net present value of a proposed project is highly dependent upon the: a. accuracy of the cash flow projections used in the analysis. b. the time frame in which the project is implemented. c. amount of the net present value in relation to the length of the project's life. d. level of capital spending in relation to the dollar amount of the net present value. e. frequency and duration of the project's cash flows.

a. accuracy of the cash flow projections used in the analysis.

6. Variable costs: a. change in direct relationship to the quantity of output produced. b. are constant in the short-run regardless of the quantity of output produced. c. reflect the change in a variable when one more unit of output is produced. d. are subtracted from fixed costs to compute the contribution margin. e. form the basis that is used to determine the degree of operating leverage employed by a firm.

a. change in direct relationship to the quantity of output produced.

37. All else constant, as the variable cost per unit increases, the: a. contribution margin decreases. b. sensitivity to fixed costs decreases. c. degree of operating leverage decreases. d. operating cash flow increases. e. net profit increases.

a. contribution margin decreases.

1. The possibility that errors in projected cash flows can lead to incorrect estimates of net present value is called _____ risk. a. forecasting b. projection c. scenario d. Monte Carlo e. accounting

a. forecasting

53. You are considering a project that you believe is quite risky. To reduce any potentially harmful results from accepting this project, you could: a. lower the degree of operating leverage. b. lower the contribution margin. c. increase the initial cash outlay. d. increase the fixed costs per unit while lowering the contribution margin. e. lower the operating cash flow of the project.

a. lower the degree of operating leverage.

11. The change in revenue that occurs when one more unit of output is sold is called the _____ revenue. a. marginal b. average c. total d. fixed e. variable

a. marginal

16. The degree to which a firm relies on fixed production costs is called its: a. operating leverage. b. financial break-even. c. contribution margin. d. cost sensitivity. e. fixed break-even.

a. operating leverage.

49. Which one of the following statements is correct about a project with an estimated internal rate of return of negative 100 percent? a. The net present value of the cash inflows is exactly equal to the initial investment in the project. b. The estimated sales volume is equal to the cash break-even level of sales. c. The estimated sales volume is equal to the financial break-even level of sales. d. The payback period is exactly equal to the life of the project. e. The net present value of the project is equal to zero.

b. The estimated sales volume is equal to the cash break-even level of sales.

55. Which one of the following could lower the risk of a project by lowering the degree of operating leverage? a. You could hire temporary workers from an employment agency rather than hire part- time employees. b. You could use sub-contractors to produce sub-assemblies of your product rather than purchase new equipment to do the work in-house. c. You could lease equipment on a long-term basis rather than buy the equipment. d. You could lower the projected selling price per unit. e. You could change the production method to one which relies more on fixed costs and less on variable costs than the current proposed method of production.

b. You could use sub-contractors to produce sub-assemblies of your product rather than purchase new equipment to do the work in-house.

7. Fixed costs: a. change as the quantity of output produced changes. b. are constant over the short-run regardless of the quantity of output produced. c. reflect the change in a variable when one more unit of output is produced. d. are subtracted from sales to compute the contribution margin. e. can be ignored in scenario analysis since they are constant over the life of a project.

b. are constant over the short-run regardless of the quantity of output produced.

17. The percentage change in operating cash flow relative to the percentage change in quantity sold is called the: a. marginal profit. b. degree of operating leverage. c. gross profit. d. net profit. e. financial break-even.

b. degree of operating leverage.

28. Sensitivity analysis helps you determine the: a. range of possible outcomes given possible ranges for every variable. b. degree to which the net present value reacts to changes in a single variable. c. net present value given the best and the worst possible situations. d. degree to which a project is reliant upon the fixed costs. e. level of variable costs in relation to the fixed costs of a project.

b. degree to which the net present value reacts to changes in a single variable.

47. All else constant, the accounting break-even level of sales will decrease when the: a. fixed costs increase. b. depreciation expense decreases. c. contribution margin decreases. d. variable costs per unit increase. e.selling price per unit decreases

b. depreciation expense decreases.

23. Conducting scenario analysis helps managers see the: a. impact of an individual variable on the outcome of a project. b. potential range of outcomes from a proposed project. c. changes in long-term debt over the course of a proposed project. d. possible range of market prices for their stock over the life of a project. e.allocation distribution of funds for capital projects under conditions of hard rationing

b. potential range of outcomes from a proposed project.

38. As additional equipment is purchased, the level of fixed costs tends to _____ and the degree of operating leverage tends to _____ a. remain constant; remain constant. b. rise; rise. c. rise; fall. d. fall; rise. e. fall; fall.

b. rise; rise.

2. An analysis of what happens to the estimate of the net present value when you consider the best case and the worst case situations is called _____ analysis. a. forecasting b. scenario c. sensitivity d. simulation e. break-even

b. scenario

12. The difference between the unit sales price and the variable cost per unit is called: a. operating leverage. b. the contribution margin. c. the gross profit. d. the net profit. e. the marginal revenue.

b. the contribution margin.

48. Blumberg Industries has just completed their analysis of a proposed project. The results show that if the project is accepted, the firm will lose an amount of money which is exactly equal to their initial investment in the project. This means that: a. the firm should accept the project as long as they are confident of the assumptions used in the analysis. b. the fixed costs per unit are exactly equal to the contribution margin at the projected level of sales. c. sales are estimated at the financial break-even point. d. the estimated cash flow is equal to the depreciation expense. e. the project has a discounted payback period exactly equal to the life of the project.

b. the fixed costs per unit are exactly equal to the contribution margin at the projected level of sales.

39. Fixed costs: I. are variable over long periods of time. II. must be paid even if production is halted. III. are generally affected by the amount of fixed assets owned by a firm. IV. per unit remain constant over a given range of production output. a. I and III only b. II and IV only c. I, II, and III only d. I, II, and IV only e. I, II, III, and IV

c. I, II, and III only

13. The sales level that results in a project's net income exactly equaling zero is called the _____ break-even. a. operational b. leveraged c. accounting d. cash e. financial

c. accounting

31. Sensitivity analysis is conducted by: a. holding all variables at their base level and changing the required rate of return assigned to a project. b. changing the value of two variables to determine their interdependency. c. changing the value of a single variable and computing the resulting change in the current value of a project. d. assigning either the best or the worst possible value to each variable and comparing the results to those achieved by the base case. e.managers after a project has been implemented to determine how each variable relates to the level of output realized

c. changing the value of a single variable and computing the resulting change in the current value of a project.

57. The management of the Wish We Could Co. has numerous requests on their desks from division managers. These requests are seeking funds for positive net present value projects with projected rates of return ranging from 8 percent to 100 percent. Management determines that they must deny all funding requests due to the financial situation of the company. Management is apparently in a situation referred to as: a. accounting break-even. b. financial break-even. c. hard rationing. d. zero leverage. e. maximum capital intensity.

c. hard rationing.

44. Given a constant sales price, the larger the contribution margin, the: a. higher the variable cost per unit as a percentage of the sales price. b. higher the cash break-even point. c. lower the financial break-even point. d. lower the fixed costs as a percentage of the sales price. e. lower the gross profit per unit sold.

c. lower the financial break-even point.

30. As the degree of sensitivity of a project to a single variable rises, the: a. lower the forecasting risk of the project. b. smaller the range of possible outcomes given a pre-defined range of values for the input. c. more attention management should place on accurately forecasting the future value of that variable. d. lower the maximum potential value of the project. e. lower the maximum potential loss of the project.

c. more attention management should place on accurately forecasting the future value of that variable.

8. Marginal costs: a. are used solely for accounting and tax purposes. b. are equal to the total costs divided by the number of units produced. c. reflect changes created by producing one more unit of output. d. are the total production expenses of a firm for some stated period of time. e. are the variable costs incurred over the entire life of a project.

c. reflect changes created by producing one more unit of output.

3. An analysis of what happens to the estimate of net present value when only one variable is changed is called _____ analysis. a. forecasting b. scenario c. sensitivity d. simulation e. break-even

c. sensitivity

18. The procedure of allocating a fixed amount of funds for capital spending to each business unit is called: a. marginal spending. b. average spending. c. soft rationing. d. hard rationing. e. marginal rationing.

c. soft rationing.

43. The contribution margin must increase as: a. both the sales price and variable cost per unit increase. b. the fixed cost per unit declines. c. the gap between the sales price and the variable cost per unit widens. d. sales price per unit declines. e. the sales price minus the fixed cost per unit increases.

c. the gap between the sales price and the variable cost per unit widens.

54. Which of the following statements are generally correct about a project with a high degree of operating leverage? I. The project has relatively high variable costs. II. The project is capital intensive. III. The amount of the initial cash outlay is generally relatively large in relation to the size of the project. IV. The forecasting risk of the project is high. a. I and II only b. III and IV only c. I, II, and III only d. II, III, and IV only e. I, II, and IV only

d. II, III, and IV only

51. Which of the following statements are correct concerning the financial break-even point of a project? I. The present value of the cash inflows equals the amount of the initial investment. II. The payback period of the project is equal to the life of the project. III. The operating cash flow is at a level that produces a net present value of zero. IV. The project never pays back on a discounted basis. a. I and II only b. I and III only c. II and IV only d. III and IV only e. I, III, and IV only

d. III and IV only

27. Which one of the following statements concerning scenario analysis of a proposed project is correct? a. The worst case scenario determines the net present value of a project given that a natural disaster occurs. b. Scenario analysis assures a firm that the actual results of a project will lie within the range of returns as computed under the best and the worst case scenarios. c. Scenario analysis provides a clear signal to management to either accept or reject a project. d. Scenario analysis only provides management with a glimpse of the possible range of outcomes that could result should a project be accepted. e. When the base case scenario results in a positive net present value, management can be assured that the proposed project will meet or exceed their expectations.

d. Scenario analysis only provides management with a glimpse of the possible range of outcomes that could result should a project be accepted.

9. Total costs: a. must equal total revenue for a project. b. are constant no matter what quantity of output is produced. c. plus the change in retained earnings must equal total revenue. d. are the summation of all the expenses of a firm for a stated period of time. e. are equal to fixed costs plus the marginal cost.

d. are the summation of all the expenses of a firm for a stated period of time.

14. The sales level that results in a project's operating cash flow exactly equaling zero is called the _____ break-even. a. operational b. leveraged c. accounting d. cash e. financial

d. cash

35. Which one of the following is most likely a variable cost? a. office rent b. property taxes c. property insurance d. direct labor costs e. management salaries

d. direct labor costs

52. You would like to know the minimal level of sales needed for a project to be accepted based on net present value. You should compute the sales quantity needed for the: a. degree of operating leverage to equal zero. b. net income to equal zero. c. operating cash flow to equal zero. d. discounted payback period to equal the life of the project. e. payback period to equal the life of the project.

d. discounted payback period to equal the life of the project.

50. The point where a project produces a rate of return equal to the required return is known as the: a. point of zero operating leverage. b. cash break-even point. c. accounting break-even point. d. financial break-even point. e. internal break-even point.

d. financial break-even point.

42. The president of your firm would like to offer special sale prices to your best customers under the following terms: 1. The prices will apply only to units purchased in excess of those normally purchased by the customer. 2. The units purchased must be paid for in cash at the time of sale. 3. The total quantity sold under these terms can not exceed the excess capacity of the firm. 4. The net profit of the firm should not be affected either positively or negatively. Given these conditions, the special sale price should be set equal to the: a. average variable cost. b. average total cost minus the marginal cost. c. sensitivity value of the variable cost. d. marginal cost. e. marginal cost minus the average fixed cost per unit.

d. marginal cost.

22. The Better Bilt Co. is fairly cautious when considering new projects and therefore analyzes each project using the most optimistic, the most realistic, and the most pessimistic value for each variable. The company is conducting: a. forecasting research. b. sensitivity analysis. c. break-even analysis. d. scenario analysis. e. competitive analysis.

d. scenario analysis.

32. To ascertain whether the accuracy of the variable cost estimate for a project will have much effect on the final outcome of the project, you should probably conduct _____ analysis. a. leverage b. scenario c. break-even d. sensitivity e.cash flow

d. sensitivity

4. An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis. a. forecasting b. scenario c. sensitivity d. simulation e.break-even

d. simulation

56. The Delta Mare Co. has received requests from each of the departments within their company for capital investment funds for next year. The management of Delta Mare decides to allocate the available funds based on the net present value (NPV) of each proposal starting with the highest NPV first. Management is following a practice known as _____ rationing. a. net present value b. rate of return c. capital improvement d. soft e. hard

d. soft

33. Simulation analysis is based on assigning a _____ and analyzing the results. a. narrow range of values to a single variable b. narrow range of values to multiple variables simultaneously c. wide range of values to a single variable d. wide range of values to multiple variables simultaneously e.single value to each of the variables

d. wide range of values to multiple variables simultaneously

24. When conducting a worst case scenario analysis, you should assume that: a. the sales quantity is at the upper end of your expectations. b. the highest sales price obtainable in the marketplace can be charged. c. no competition exists in the marketplace. d. your variable costs per unit are at the high end of the spectrum of possible prices. e. your fixed costs are constant and at the low end of your cost range.

d. your variable costs per unit are at the high end of the spectrum of possible prices.

5. An analysis of the relationship between the sales volume and various measures of profitability is called _____ analysis. a. forecasting b. scenario c. sensitivity d. simulation e. break-even

e. break-even

20. When firms do not have sufficient available financing to invest in all of the positive net present value projects they have identified, _____ is (are) said to exist. a. excess financing b.contingency options c. strategic options d. managerial options e. capital rationing

e. capital rationing

29. Assume that you graph the changes in net present value against the changes in the value of a single variable used in a project. The steepness of the resulting function illustrates the: a. degree of operating leverage within the project. b. trade-off of variable versus fixed costs utilized by the project. c. range of total outcomes possible from accepting a proposed project. d. contribution margin of the project at various levels of output. e. degree of sensitivity of a project's outcome to a single variable of the project.

e. degree of sensitivity of a project's outcome to a single variable of the project.

15. The sales level that results in a project's net present value exactly equaling zero is called the _____ break-even. a. operational b. leveraged c. accounting d. cash e. financial

e. financial

19. The situation that exists when a firm has no means of financing any of its positive net present value projects is referred to as: a. financial stop-loss. b. contingency planning. c. marginal loss planning. d. soft rationing. e. hard rationing.

e. hard rationing.

10. Average total cost: a. increases in direct proportion to an increase in output. b. is constant no matter what quantity of output is produced. c. changes as a function of the next unit of output produced. d. is the summation of all the expenses of a firm for a stated period of time. e. is equal to the average fixed cost plus the average variable cost.

e. is equal to the average fixed cost plus the average variable cost.

25. The base case values used in scenario analysis are the ones considered the most: a. optimistic. b. desired by management. c. pessimistic. d. conducive to creating a positive net present value. e. likely to occur.

e. likely to occur.

41. Management wants to offer a "Thank You" sale to its customers by offering to sell additional units of a product at the lowest price possible without affecting their profits. The price management charges for these one-time sale units should be set equal to the: a. average variable cost. b. average total cost. c. average total revenue. d. marginal revenue. e. marginal cost.

e. marginal cost.

34. The type of analysis that is most dependent upon the use of a computer is _____ analysis. a. scenario b. break-even c. sensitivity d. degree of operating leverage e. simulation

e. simulation

46. At the accounting break-even level of sales, the operating cash flow is equal to: a. the net present value. b. fixed costs plus depreciation. c. the contribution margin times the quantity produced. d. fixed costs plus depreciation divided by the contribution margin. e. the depreciation expense.

e. the depreciation expense.