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