Question 1

How much depreciation expense exists in a firm that has a break-even level of revenues of $2 million,fixed costs of $400,000,and a 60% ratio of variable costs to sales?

Accepted Answer

A)  $144,000 
B)  $266,667 
C)  $400,000 
D)  $666,667 
A)  $144,000 
B)  $266,667 
C)  $400,000 
D)  $666,667

Question 2

Calculate the ratio of variable costs to sales for a firm with a $3 million accounting break-even revenue point,$1.2 million fixed costs,and $450,000 depreciation.

Accepted Answer

A)  40% 
B)  45% 
C)  55% 
D)  60% 
A)  40% 
B)  45% 
C)  55% 
D)  60%

Question 3

The NPV break-even level of sales will be higher than the accounting break-even level.

Accepted Answer

A) True 
 B)False

Question 4

What is the change in the NPV of a one-year project if fixed costs are increased from $400 to $600,assuming the firm is profitable,has a 35% tax rate,and a 12% cost of capital?

Accepted Answer

A)  −$200.00 
B)  −$178.57 
C)  −$130.00 
D)  −$116.07 
A)  −$200.00 
B)  −$178.57 
C)  −$130.00 
D)  −$116.07

Question 5

Recognizing that it may be in managers' best interests to be overly optimistic when proposing projects,how might firms effectively control this impulse?

Accepted Answer

A)  Employ capital rationing 
B)  Require that all proposals be initiated from the lowest possible management level 
C)  Fire managers if any of their proposals fail to produce the expected results 
D)  Fund all project proposals 
A)  Employ capital rationing 
B)  Require that all proposals be initiated from the lowest possible management level 
C)  Fire managers if any of their proposals fail to produce the expected results 
D)  Fund all project proposals

Question 6

If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level,then:

Accepted Answer

A)  fixed costs should be traded for variable costs. 
B)  variable costs should be traded for fixed costs. 
C)  the project should not be undertaken. 
D)  additional marketing analysis may be beneficial before proceeding. 
A)  fixed costs should be traded for variable costs. 
B)  variable costs should be traded for fixed costs. 
C)  the project should not be undertaken. 
D)  additional marketing analysis may be beneficial before proceeding.

Question 7

Weston's has variable costs that average 68% of sales.If fixed costs increase by $1,what will be the increase in the break-even level of revenues?

Accepted Answer

A)  An increase of $0.68 
B)  An increase of $1.00 
C)  An increase of $1.471 
D)  An increase of $3.125 
A)  An increase of $0.68 
B)  An increase of $1.00 
C)  An increase of $1.471 
D)  An increase of $3.125

Question 8

Managers that accept projects that only break even on an accounting basis are helping their shareholders.

Accepted Answer

A) True 
 B)False

Question 9

What effect will a reduction in the cost of capital have on the accounting break-even level of revenues?

Accepted Answer

A)  It raises the break-even level. 
B)  It reduces the break-even level. 
C)  It has no effect on the break-even level. 
D)  This cannot be determined without knowing the length of the investment horizon. 
A)  It raises the break-even level. 
B)  It reduces the break-even level. 
C)  It has no effect on the break-even level. 
D)  This cannot be determined without knowing the length of the investment horizon.

Question 10

A firm with $800,000 of fixed costs including $200,000 of depreciation is expected to produce $225,000 in profits.What is its DOL?

Accepted Answer

A)  3.56 
B)  3.67 
C)  4.56 
D)  4.67 
A)  3.56 
B)  3.67 
C)  4.56 
D)  4.67

Question 11

The Corner Market has fixed costs of $1,600,depreciation of $1,200,a tax rate of 35%,and a cost of capital of 12%.Variable costs represent 67% of sales.What minimum level of sales must the market obtain to avoid a net loss on its income statement?

Accepted Answer

A)  $8,484.85 
B)  $6,666.67 
C)  $7,033.33 
D)  $7,867.67 
A)  $8,484.85 
B)  $6,666.67 
C)  $7,033.33 
D)  $7,867.67

Question 12

If a firm's DOL is 3.6 with a profit of $2,000,000 and depreciation of $500,000,what are its other fixed costs?

Accepted Answer

A)  $5,250,000 
B)  $4,700,000 
C)  $5,520,000 
D)  $5,800,000 
A)  $5,250,000 
B)  $4,700,000 
C)  $5,520,000 
D)  $5,800,000

Question 13

In a graphic depiction of accounting break-even analysis,the greater the slope of the total cost line,the higher the:

Accepted Answer

A)  level of fixed costs. 
B)  level of total revenue. 
C)  number of units sold. 
D)  percentage of variable costs to sales. 
A)  level of fixed costs. 
B)  level of total revenue. 
C)  number of units sold. 
D)  percentage of variable costs to sales.

Question 14

A firm that employs largely agency staff is likely to have higher operating leverage than one that employs its staff on long-term contracts.

Accepted Answer

A) True 
 B)False

Question 15

The level of sales that produces a zero project NPV is referred to as the accounting break-even point.

Accepted Answer

A) True 
 B)False

Question 16

A firm with high operating leverage is expected to:

Accepted Answer

A)  have high variable costs. 
B)  have low fixed costs. 
C)  have a high degree of profitability. 
D)  perform particularly well when sales are high. 
A)  have high variable costs. 
B)  have low fixed costs. 
C)  have a high degree of profitability. 
D)  perform particularly well when sales are high.

Question 17

Which company is likely to have high operating leverage?

Accepted Answer

A)  A company with high fixed costs. 
B)  A company with high variable costs. 
C)  A company with low fixed costs. 
D)  A company financed largely by debt 
A)  A company with high fixed costs. 
B)  A company with high variable costs. 
C)  A company with low fixed costs. 
D)  A company financed largely by debt

Question 18

Which of the following correctly describes sensitivity analysis?

Accepted Answer

A)  recalculation of project NPV by changing several inputs to new but consistent values. 
B)  measures the degree to which fixed costs magnify the effect on profits of a shortfall in sales. 
C)  analysis of how project NPV changes if different assumptions are made about key variables. 
D)  measures the future level of sales at which NPV equals zero. 
A)  recalculation of project NPV by changing several inputs to new but consistent values. 
B)  measures the degree to which fixed costs magnify the effect on profits of a shortfall in sales. 
C)  analysis of how project NPV changes if different assumptions are made about key variables. 
D)  measures the future level of sales at which NPV equals zero.

Question 19

Sensitivity analysis takes into consideration the interrelationship of variables.

Accepted Answer

A) True 
 B)False

Question 20

If a firm doubled its level of fixed costs but maintained its operating leverage,then one explanation may be that:

Accepted Answer

A)  depreciation expense increased to offset the increase. 
B)  sales revenue also doubled and the proportion of variable costs did not change. 
C)  sales revenues declined and the proportion of variable costs doubled. 
D)  pretax profits decreased. 
A)  depreciation expense increased to offset the increase. 
B)  sales revenue also doubled and the proportion of variable costs did not change. 
C)  sales revenues declined and the proportion of variable costs doubled. 
D)  pretax profits decreased.

Exam 10: Project Analysis

How much depreciation expense exists in a firm that has a break-even level of revenues of $2 million,fixed costs of $400,000,and a 60% ratio of variable costs to sales?

Calculate the ratio of variable costs to sales for a firm with a $3 million accounting break-even revenue point,$1.2 million fixed costs,and $450,000 depreciation.

The NPV break-even level of sales will be higher than the accounting break-even level.

What is the change in the NPV of a one-year project if fixed costs are increased from $400 to $600,assuming the firm is profitable,has a 35% tax rate,and a 12% cost of capital?

Recognizing that it may be in managers' best interests to be overly optimistic when proposing projects,how might firms effectively control this impulse?

If sensitivity analysis concludes that the largest impact on profits would come from changes in the sales level,then:

Weston's has variable costs that average 68% of sales.If fixed costs increase by $1,what will be the increase in the break-even level of revenues?

Managers that accept projects that only break even on an accounting basis are helping their shareholders.

What effect will a reduction in the cost of capital have on the accounting break-even level of revenues?

A firm with $800,000 of fixed costs including $200,000 of depreciation is expected to produce $225,000 in profits.What is its DOL?

The Corner Market has fixed costs of $1,600,depreciation of $1,200,a tax rate of 35%,and a cost of capital of 12%.Variable costs represent 67% of sales.What minimum level of sales must the market obtain to avoid a net loss on its income statement?

If a firm's DOL is 3.6 with a profit of $2,000,000 and depreciation of $500,000,what are its other fixed costs?

In a graphic depiction of accounting break-even analysis,the greater the slope of the total cost line,the higher the:

A firm that employs largely agency staff is likely to have higher operating leverage than one that employs its staff on long-term contracts.

The level of sales that produces a zero project NPV is referred to as the accounting break-even point.

A firm with high operating leverage is expected to:

Which company is likely to have high operating leverage?

Which of the following correctly describes sensitivity analysis?

Sensitivity analysis takes into consideration the interrelationship of variables.

If a firm doubled its level of fixed costs but maintained its operating leverage,then one explanation may be that:

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