small business finance chpt 21-24

If revenue is $40 per unit, variable costs are $25 per unit, and monthly fixed costs are $10,000, how many dollars of sales are needed to achieve breakeven for a given month?

$26,667. Contribution margin percentage equals (revenue per unit minus variable cost per unit) divided by revenue per unit, in this example, ($40 ñ 25) / $40 = $15 / $40 = 37.5%. Breakeven amount equals fixed costs divided by contribution margin percentage, in this case, $10,000 / .375 = $26,666.67 = $26,667.

Revenue per unit is $85, and cost of goods sold per unit is $25. Calculate the unit contribution margin.

$60. Unit contribution margin equals the revenue per unit minus the variable cost per unit, in this case, $85 - $25 = $60.

If revenue is $50 per unit, and variable costs are $35 per unit, for each dollar of sales, how much gross profit is available for use in paying fixed costs?

0.30. Contribution margin percentage equals (revenue per unit minus variable cost per unit) divided by revenue per unit, in this example, ($50 - $35) / $50 = $15 / $50 = 30%.

If revenue is $50 per unit, and variable costs are $35 per unit, calculate the contribution margin percentage.

30%. Contribution margin percentage equals (revenue per unit minus variable cost per unit) divided by revenue per unit, in this example, ($50 - $35) / $50 = $15 / $50 = 30%.

If revenue per sale is $100, cost of goods sold per sale is $60, gross profit per sale is $40, and net profit per sale is $10, what is the unit contribution margin?

40.Unit contribution margin equals the revenue per unit minus the variable cost per unit, in this example, $100 - $60 = $40.

Fixed costs are $10,000 per month, and the unit contribution margin is $20. Calculate the breakeven volume.

500 units. Breakeven volume equals the fixed costs divided by the unit contribution margin, in this example, $10,000 / $20 = 500 units.

A-1 Pest Controlís basic extermination services sell for $125 and cost the company $100 to provide. The fixed costs of monthly operations are $1,500. Assuming A-1 only sells basic extermination services, what is the A-1 breakeven volume?

60 units. Unit contribution margin equals revenue per unit minus variable cost per unit, in this example, $125 - $100 = $25. Breakeven volume equals fixed costs divided by unit contribution margin, in this case, $1,500 / $25 = 60 units.

When a business plans a rapid expansion, which of these statements is most correct?

A cash injection will be needed from investors or lenders. A rapidly growing business will need additional cash from its owners or lenders.

Which type of business is most likely to use sales per square foot as a measure of operational efficiency?

A womanís clothing store. Retailers often use sales per square foot as a measure of operational efficiency.

In reviewing the projected financial statements for the expansion of Alís Meat Market, Al notes an increase in net profits. What should Al do next?

Analyze the change in margins. The growth of a business should be evaluated using a combination of the change in profits, change in margins, and change in returns.

If an economist asks an accountant for the fixed costs of the business, what lines for the profit and loss statement should be included in the accountantís response?

Asset lease payments Rent Accounting staff salaries.Corporate staff salaries, rent, and asset lease payments are all examples of fixed costs.

John is the owner of JB Manufacturing and is reviewing the projected financial statements for JB Manufacturing; assume that he purchases another manufacturing company. John notes that if the acquisition is completed, both the assets and liabilities of JB Manufacturing will have increased. Which of the following is true?

Assets and liabilities would be expected increase with the addition of another division. When a business grows, assets and liabilities would be expected to increase. It cannot be determined if the expansion is a good idea solely from reviewing assets and liabilities.

When is the best time to approach a lender seeking the cash needed for the expansion of a business?

Before beginning the expansion. Lenders should be approached during the planning stages of a business expansion, before the cash is actually needed.

Which of the following is not a criterion to evaluate the growth plans for a business?

Change in assets and liabilities. The growth of a business should be evaluated using a combination of the change in profits, change in margins, and change in returns.

Consumer Warehouse Club is evaluating a change in product mix for 2018 and uses an operational-centric strategy. Which of the following is management most likely to focus on when evaluating the change in product mix?

Change in profits. An operational-centric business will focus on profits when evaluating an expansion opportunity.

Central Photography is a customer-centric company considering opening an additional store in a neighboring town. Which of the following should the company consider when making their decision?

Change in return on equity Change in total profits Change in net margin.

Which of the following is the best example of a variable cost?

Cost of services.Cost of services would vary depending on the number of services sold during the month. The others are fixed costs.

If a business chooses not to grow when competitors enter the market, which of the following is the most likely outcome?

Declining market share. If a business does not grow when competitors enter the market, they may find that their market share has declined.

During the growth phase of a business, a negative ending cash balance projection is acceptable, provided the long-term cash outlook is positive.

False. A negative cash balance projection means a company will not have sufficient cash to pay its bills. It might not be in business long enough to achieve its long-term positive cash position.

The growth of a business should be evaluated using a combination of the change in revenues, assets, and liabilities.

False. The growth of a business should be evaluated using a combination of the change in profits, change in margins, and change in returns.

When a cash flow forecast indicates a negative cash balance at the end of a month, which action is most appropriate?

Identify sources of additional debt or equity. A business will need to identify additional sources of cash for any period in with the cash balance is forecast to be negative.

Which of the following is the most important use of a cash flow projection for the expansion of a business?

Identifying periods where the ending cash balance is projected to be negative. The most important use of a cash flow projections is to identify periods where ending cash balance is projected to be negative.

Once a business has calculated breakeven volume, calculating sales per period can help determine which of the following?

If the business can operationally sell that many units.Once a business has calculated breakeven volume, calculating sales per period can help determine if the business can operationally sell that many units.

Which of the following is a reason not to grow a business?

Lack of expertise The net margin will decrease Limited staff resources

When new competitors enter the market offering the same products as your business, which strategy is most appropriate?

Modifying product offerings to improve customer value.When new competitors enter a market, existing businesses should review their product offering in an effort to maximize customer value

Celeste currently owns a beauty salon that has four stations and employs four stylists. The salon also employs a cashier/receptionist and Celeste draws a salary as salon manager. If Celeste adds two additional stations within the existing space in her beauty salon and hires two additional stylists to staff those stations, which of the following is most likely to be true?

Operating expenses per styling will decline. If two new stations are added, Celeste will be able to spread her operating expenses over more stylings. Operating expenses per styling will decline.

During the first year of a small manufacturing business, which of the following is likely to be the most significant cash inflow?

Ownerís investment. Ownerís investment is a typical source of funding when starting a small business.

The Premier Boat Company began operations over 20 years ago as a builder of hand-crafted kayaks and canoes. In their early years, the company earned gross margins approaching 70 percent. Premier has since acquired several other manufacturers and now earns gross margins slightly below 50 percent. Premier is currently evaluating the purchase of large kayak manufacturer. According to the financial projections, if the acquisition is complete, Premierís gross margin will be 35 percent. Which of the following will be true if Premier completes this latest acquisition?

Premier will have moved from a customer-centric strategy to an operational-centric strategy. When gross margins decline significantly, a company becomes more operationally-centric.

From a financial perspective, which of the following should be considered when evaluating growth opportunities?

Profitability

Which of the following best provides an indication of the sustainability of business growth?

Profitability ratios. Profitability ratios provide the best indication of the ability of the business to generate profits.

During the first year of a small manufacturing business, which of the following is likely to be the most significant cash outflow?

Purchase of factory machinery. The purchase of factory equipment is typically one of the largest expenses when starting a manufacturing business.

Which of the following best provides an indication of the relative benefits of growth to a businessís owners?

Return ratios. Return ratios measure the return being received by the businessís owners. If return ratios are not increasing, this might be a reason not to pursue and expansion.

Which of the following business expansion outcomes is most desirable to an entrepreneur seeking to grow profitable business?

Revenue increases more rapidly than expenses. The goal of a business expansion is to increase profits. This will occur when revenues increase more rapidly than expenses.

If an economist asks an accountant for the variable costs of the business, what lines from the profit and loss statement should be included in the accountantís response?

Sales staff commissions Cost of services Cost of goods sold.response? Cost of services, cost of goods sold, and commissions are all examples of variable costs.

Assuming fixed costs are $5,000 per month, the unit contribution margin is $150, and the business sold 30 units during the month, which statement is most correct?

The business did not breakeven for the month. Breakeven volume equals fixed costs divided by unit contribution margin, in this case, $5,000 / $150 = 33.3 units. But the business only sold 30 units so the business did not breakeven for the month.

During the second year of operations, Bradyís Cleaning Service spent a total of $133,000 in cash while receiving $145,000 in cash. Which of the following statements is most correct?

The business had a net cash flow of $12,000. The net cash flow of the business for the year is $12,000, in this example, $145,000 - $133,000 = $12,000.

First year projections for Bradyís Cleaning Service show the business spending $73,000 while receiving $43,000 in cash from operations. Which of the following statements is most correct?

The business needs $30,000 of financing cash flow to survive the year. Bradyís Cleaning Service is expected to spend $30,000 more than it will receive and therefore will need at least $30,000 to survive the year.

Central Photography is a customer centric company considering opening an additional store in a neighboring town. Adding the additional store will increase total profits but lead to a 20 percent reduction in gross margin and operating margin, and to a 15 percent decrease in return on equity. Which of the following is true?

The company is becoming more operational-centric

Which of the following is not a reason to grow a business?

To remain competitive To meet changing customer demand To become operationally efficient

When a business borrows in order to fund the capital expenses of an expansion, which of the following is always true?

Total assets and total liabilities will increase.Borrowing to purchase assets will increase total assets and total liabilities. The effect on profits can only be determined by reviewing projected profit and loss statements.

. Customer demand should drive product decisions.

True

The goal of a business expansion is to increase profits and increase returns to the owners.

True

When industry changes affect your business, which strategy is likely to be least effective?

Waiting for the industry return to normal. Ignoring industry changes and waiting for the industry to return to its old status quo is not likely to be an effective business strategy.

When planning the cash needs of business expansion, which of the following should always be included in the forecast?

Working capital needs. Working capital needs should always be included when considering the expansion of a business.

A unit contribution margin of $5 means each time a unit is sold, _______________.

a business earns $5 that can be used to pay fixed costs.A unit contribution margin of $5 means each time a unit is sold, a business earns $5 that can be used to pay fixed costs.

When a business grows, all of the following are likely to happen except _________.

a decrease in working capital. Revenue, cost of goods sold, operating expenses, and working capital are all likely to increase when a business is growing.

When growing a business, ___________ may be required.

additional staff new expertise managementís time. A growing business may require additional staff and additional expertise.

Transitioning from a place-based retail strategy to an online retail strategy requires _________________.

an ecommerce website expertise money. Money, expertise, and an ecommerce website are needed to pursue an online retail strategy.

Unit contribution margin is a measure of the _______________.

average gross profit from each unit sold.Unit contribution margin is a measure of the average gross profit from each unit sold.

Breakeven volume is also known as _____________.

breakeven point.The breakeven point is another name for breakeven volume.

If a business sells exactly its breakeven volume, the _______________.

business is neither making money nor losing money.If a business sells exactly its breakeven volume, the business is breaking even, neither making money nor losing money.

Projected asset purchases that are needed to expand a business will affect the first monthís projected ______________.

cash flow statement and the balance sheet. Asset purchases affect the cash flow statement and the balance sheet, but not the profit and loss statement.

A fixed cost is a ____________________.

cost that does not change with production volume.A fixed cost is a cost that does not change with production volume.

A variable cost is a ________________________.

cost that varies with production volume.A variable cost is a cost that varies with production volume.

Breakeven amount is calculated as fixed costs _________________.

divided by contribution margin percentage. Breakeven amount is calculated as fixed costs divided by contribution margin percentage.

The contribution margin percentage measures the _____________.

dollar amount from each sale available to cover fixed costs. The contribution margin percentage measures the dollar amount from each sale available to cover fixed costs.

Breakeven amount measures the ______________.

dollar amount of revenue needed to cover fixed costs.Breakeven amount measures the dollar amount of revenue needed to cover fixed costs.

. When an accountant says ìoperating expenses,î an economist might think of it as a _______________.

fixed cost.An economist would consider operating expenses to be a fixed cost.

The formula for total costs is ______________.

fixed costs plus variable costs.Fixed costs plus variable costs equals total costs.

One of the key roles of the cash flow projection is _____________________.

identifying any additional cash needs. Identifying cash needs is one of the key purposes of developing a cash flow projection.

When planning the expansion of a business, one strategy to reduce out of pocket startup costs is to _______________.

lease equipment rather than buy. Leasing equipment reduces the need for a large cash outlay to purchase the equipment.

Transitioning from a place-based retail strategy to an online retail strategy requires all of the following except __________________.

locations in high traffic areas. An online retail strategy does not require the business to be located in a high traffic area.

The best reason to introduce new and improved products is to _______________.

meet changing customer needs

An operational efficient company focuses on _______________.

minimizing cost per unit. An operationally efficient business focuses on reducing costs such as by minimizing cost per unit.

If a retailer cannot keep the shelves stocked with a particular product, they should consider each of the following strategies except ___________________.

modifying the product packing

Growing a business requires ___________________.

money and organizational capacity. Growing a business requires money and organizational capacity.

Breakeven volume measures the __________________.

number of units that must be sold to cover fixed costs.Breakeven volume measures the number of units that must be sold to cover fixed costs.

The contribution margin percentage is defined as the ______________.

percentage contribution to profits from each dollar of sales. The contribution margin percentage is defined as the percentage contribution to profits from each dollar of sales.

Sources of cash for business growth include all of the following except _______________.

retained earnings. Sources of cash for business growth include additional ownersí investment, proceeds from a bank loan, and cash flow from operations. Retained earnings are not a source of cash.

In an ideal situation, business growth should increase ______________.

return on equity net profits net margin.The growth of a business should be evaluated using a combination of the change in profits, change in margins, and change in returns. If all have increased, the growth should be viewed favorably.

The contribution margin percentage is calculated as _____________.

revenue less variable costs divided by revenue. The contribution margin percentage is calculated as revenue less variable costs divided by revenue.

Operational efficiency depends on ______________.

size and volume

Growth provides an operational-centric business an opportunity to ______________.

spread costs over a large sales volume. Growth provides an operational-centric business an opportunity to spread costs over a large sales volume.

The amount of money needed to grow a business depends on ____________.

the amount of working capital used in the business the cash collection cycle the additional capital expenses of the expansion. The amount of money needed for growth depends on the cash collection cycle, the amount of working capital used in the business, and the capital expenses of the expansion.

When forecasting the expansion of an existing business, the starting point for the forecast should be _________________.

the existing financial statements for the business. The existing financial statements should be the starting point of a business expansion forecast.

When profits increase during a business expansion, return on equity will always increase when _______________.

the funds for the expansion are borrowed. Borrowing the funds for an expansion will increase the return on equity as the denominator in the return on equity calculation remains fixed while the numerator has been increased.

The starting point for developing a cash flow projection is ______________.

the prior period ending cash balance and the revenue and expenses from the projected profit and loss statement. Cash flow projections for an expansion should be developed using the prior period ending cash balance and the revenue and expenses from the projected profit and loss statement.

When an accountant says ìcost of goods sold,î an economist might think of it as a ______________.

variable cost.An economist would consider cost of goods sold to be a variable cost.