Deck 5: Profit, Profitability, and Break-Even Analysis

Question 1

Your company is efficient if you set a specific goal and accomplish that goal with the use of maximum resources.

Answer 1

False

Question 2

Retail firms that sell hundreds of items will normally calculate break even for every product they sell.

Answer 2

False

Question 3

In a leveraged approach, the break -even point is higher than in a conservative approach.

Answer 3

True

Question 4

Profitability is an absolute number that appears on the bottom line of an income statement.

Question 5

When you go into business, your goal should be to earn both an accounting and an entrepreneurial profit.

Question 6

The degree of operating leverage can be explained by using the following 2 variables : sales and earnings per share.

Question 7

Profit is an absolute number that appears on the bottom line of an income statement.

Question 8

Chapter 11 bankruptcy occurs when a business has to liquidate all of its assets in order to pay off its creditors.

Question 9

When a corporation enters Chapter 7 bankruptcy, the stockholders don't have to worry because after the business is sold, they will receive their investment back.

Question 10

Chapter 7 bankruptcy occurs when a company is forced to liquidate all of its assets in order to pay off its creditors.

Question 11

Another term for entrepreneurial profit is accounting profit.

Question 12

When a company sells fewer units of a product than are required to break even, the company is losing money.

Question 13

Once a company sells more units of a product than are required to break even, the company will make a profit.

Question 14

For a business using leverage, the owner of the business can always count on having to pay the same interest payments on debt.

Question 15

The degree of combined leverage is the product of the degree of operating leverage and the degree of financial leverage.

Question 16

The degree of financial leverage can be explained by using the following 2 variables: operating income and earnings per share.

Question 17

The degree of combined leverage can be explained by using the following 2 variables: sales and earnings per share.

Question 18

You are using financial leverage when you use your own money to finance your debt.

Question 19

Your company is effective if you establish a specific goal and accomplish that goal.

Question 20

Chapter 11 bankruptcy occurs when a business seeks court protection to hold off its creditors while a plan is developed to pay off its creditors.

Question 21

You invested $5,000 in the Cog corporation and $5,000 in the Gear corporation. Both of these corporations have $100 million in total assets. The Cog corporation had a net profit of $5 million and the Gear corporation had a net profit of $10 million. You read their annual reports and both companies had established a goal of having a net profit equal to 10% of total assets.

A) Cog is effective but less efficient than Gear.
B) Cog is effective and more efficient than Gear.
C) Gear is effective but less efficient than Cog.
D) Gear is effective and more efficient Cog.
E) Cannot tell without more information.

Question 22

Accomplishing a specific task or reaching a goal is the basic definition of

A) efficiency.
B) effectiveness and efficiency.
C) effectiveness.
D) none of the above.

Question 23

Normally to compute break even, the manufacturing firm will use and the retail firm will use _ .

A) discrete units; discrete units
B) sales dollars; discrete units
C) discrete units; sales dollars
D) sales dollars; sales dollars

Question 24

Profitability is the same as

A) effectiveness.
B) profit.
C) return on investment.
D) expectations of the owners.
E) meeting a goal.

Question 25

You invested $5,000 in the Cog corporation and $5,000 in the Gear corporation. Both of these corporations have $100 million in total assets. The Cog corporation had a net profit of $5 million and the Gear corporation had a net profit of $10 million. You read their annual reports and both companies had established a goal of having a net profit equal to 15% of total assets.

A) Cog is more effective than Gear.
B) Cog is more efficient than Gear.
C) Gear is more efficient than Cog.
D) Gear is more effective than Cog.
E) Cannot tell without more information.

Question 26

Sam quit his job as an accountant with We Keep Books Accurately to open his own accounting firm. He earned $40,000 with the accounting firm We Keep Books Accurately. During the current year, Sam had revenues of $150,000 and total expenses of $110,000. For Sam, the opportunity cost of going into business was

A) $110,000.
B) $40,000.
C) $150,000.
D) zero, because he had a profitable business.

Question 27

In order to determine the break -even point, we must identify several variables. At a minimum we must know

A) variable costs.
B) fixed costs.
C) sales.
D) all of the above.

Question 28

Break -even analysis is the process of determining before we begin earning a profit.

A) what price will be charged for a product, or how much net profit will be made
B) how many units must be produced, or how much revenue must be obtained
C) how much net profit will be made, or how many units will be produced
D) how much revenue must be obtained, or how much net profit will be made
E) what price we will charged for a product, or how many units must be produced

Question 29

Joan purchases a government bond for $10,000 that pays 7% annual interest. Jim purchases $20,000 worth of corporate bonds that pay 10% annual interest. If Joan's goal is to earn $700 per year on her investment, and Jim's goal is to earn $2,000 per year on his investment, then

A) both Jim and Joan are effective.
B) Jim is more efficient than Joan.
C) Joan is more efficient than Jim.
D) both A and B above are correct.
E) both A and C above are correct.

Question 30

Florida is a state that has the Homestead exemption.

Question 31

All of the costs that a firm must pay, even if there are no sales are

A) sales costs.
B) variable costs.
C) prices charged.
D) fixed costs.
E) contribution costs.

Question 32

Obtaining the highest possible return with the minimum use of resources committed is the basic definition of

A) effectiveness and efficiency.
B) efficiency.
C) effectiveness.
D) none of the above.

Question 33

Sam quit his job as an accountant with We Keep Books Accurately to open his own accounting firm. He earned $40,000 with the accounting firm We Keep Books Accurately. During the current year, Sam had revenues of $150,000 and total expenses of $110,000. Sam earned an

A) accounting profit of $40,000.
B) entrepreneurial profit of $40,000, but had an accounting loss.
C) accounting profit of $40,000 and an entrepreneurial profit of $40,000.
D) entrepreneurial profit of $40,000.
E) Both A and D above are correct.

Question 34

Sam quit his job as an accountant with We Keep Books Accurately to open his own accounting firm. He earned $40,000 with the accounting firm We Keep Books Accurately. During the current year, Sam had revenues of $190,000 and total expenses of $110,000. Sam earned an

A) accounting profit of $80,000 and an entrepreneurial profit of $40,000.
B) accounting profit of $40,000.
C) entrepreneurial profit of $80,000.
D) entrepreneurial profit of $80,000, and an accounting profit of $40,000.
E) Cannot tell with the information provided.

Question 35

Sam quit his job as an accountant with We Keep Books Accurately to open his own accounting firm. He earned $40,000 with the accounting firm We Keep Books Accurately. During the current year, Sam had revenues of $150,000 and total expenses of $110,000. Sam earned an

A) accounting profit of $40,000.
B) entrepreneurial profit of $40,000, but had an accounting loss.
C) accounting profit of $40,000 and an entrepreneurial profit of $40,000.
D) entrepreneurial loss of $40,000.
E) Both A and D above are correct.

Question 36

The lower the DOL, the greater the change in operating income will be as a result of a slight change in sales.

Question 37

Leverage uses those fixed costs of finance only to magnify a company's return.

Question 38

The basic formula for calculating break even is

A) FC/(P -VC).
B) VC/(FC -P).
C) FC/(VC -P).
D) P/(FC -VC).
E) VC/(P -FC).

Question 39

The contribution margin in break -even analysis is derived by subtracting

A) variable cost per unit from fixed costs.
B) variable cost per unit from price.
C) fixed costs from variable costs.
D) price from variable costs.
E) fixed costs from price.

Question 40

If a company has no operating leverage, its degree of financial leverage is equal to its degree of combined leverage.

Question 41

Table 5 -2. Jane's Dress Emporium

Refer to Table 5 -2. Jane's fixed costs are per month.

A) $2,200
B) $6,900
C) $7,000
D) $7,200
E) $6,800

Question 42

Table 5 -1. Steel Shelf Company

Refer to Table 5 -1. The Steel Shelf Company has variable costs per unit of

A) $10.00.
B) $25.00
C) $20,00.
D) $18.33.

Question 43

Table 5 -1. Steel Shelf Company

Refer to Table 5 -1. At 600 units of production, the Steel Shelf Company has monthly fixed costs of

A) $12,000.
B) $5,000.
C) $6,000.
D) $1,000.

Question 44

Table 5 -1. Steel Shelf Company

Refer to Table 5 -1. At 600 units of production, the Steel Shelf Company has total revenue of

A) $5,000.
B) $12,000.
C) $6,000.
D) $1,000.

Question 45

Table 5 -2. Jane's Dress Emporium

Refer to Table 5 -2. Jane's contribution margin is

A) 0.52%.
B) 0.48%.
C) 48%.
D) 52%.

Question 46

Table 5 -2. Jane's Dress Emporium

In a conservative approach, a company will have

A) high fixed costs.
B) low variable costs.
C) a narrow contribution margin.
D) none of the above.

Question 47

Table 5 -1. Steel Shelf Company

Refer to Table 5 -1. The Steel Shelf Company has annual fixed costs of .

A) $69,600
B) $60,000
C) $56,400
D) $135,600
E) $5,300

Question 48

Table 5 -1. Steel Shelf Company

Refer to Table 5 -1. At 600 units of production, the Steel Shelf Company has total variable costs of

A) $1,000.
B) $6,000.
C) $12,000.
D) $5,000.

Question 49

Table 5 -2. Jane's Dress Emporium

The earning power of a company can be defined as the product of two factors:

A) net profit margin and total asset turnover.
B) net profit margin and fixed asset turnover.
C) fixed asset turnover and cash flow per share.
D) total asset turnover and earnings per share.

Question 50

Table 5 -1. Steel Shelf Company

Refer to Table 5 -1. The Steel Shelf Company charges a price of per unit.

A) $25.00
B) $20.00
C) $10.00
D) $18.33

Question 51

Table 5 -1. Steel Shelf Company

Refer to Table 5 -1. At 600 units of production, the Steel Shelf Company will make a profit of

A) $1,000.
B) $12,000.
C) $5,000.
D) $6,000.

Question 52

Table 5 -1. Steel Shelf Company

Refer to Table 5 -1. If the Steel Shelf Company wants to earn a profit of $3,000 per month they will have to produce shelves.

A) 500
B) 800
C) 1,500
D) 1,000

Question 53

Table 5 -2. Jane's Dress Emporium

Refer to Table 5 -2. What will Jane's Dress Emporium have to sell each month in order to break even?

A) $25,000.00
B) $13,461.54
C) $13,846.15
D) $14,583.33
E) $15,000.00

Question 54

Table 5 -1. Steel Shelf Company

Refer to Table 5 -1. The Steel Shelf Company has monthly fixed costs of and a contribution margin of .

A) $5,800; $10
B) $11,300; $20
C) $5,000; $10
D) $5,000; $20
E) $11,300; $10

Question 55

Table 5 -1. Steel Shelf Company

Refer to Table 5 -1. The Steel Shelf Company has variable costs of per shelf.

A) $9.00
B) $10.00
C) $20.00
D) $30.00
E) $9.25

Question 56

Table 5 -2. Jane's Dress Emporium

Refer to Table 5 -2. If Jane sold $25,000 worth of dresses last month, she would have a

A) loss of approximately $6,000.
B) profit of approximately $5,540.
C) loss of approximately $5,540.
D) profit of approximately $6,000.
E) Cannot tell with information provided.

Question 57

Table 5 -1. Steel Shelf Company

Refer to Table 5 -1. At 300 units of production, the Steel Shelf Company

A) loses $2,000.
B) earns $2,000.
C) loses $1,000.
D) earns $1,000.

Question 58

Table 5 -2. Jane's Dress Emporium

Refer to Table 5 -2. If Jane sells $10,000 worth of dresses next month, she will

A) earn a profit of approximately $1,660.
B) lose approximately $1,800.
C) lose approximately $1,660.
D) earn a profit of approximately $1,800.
E) Cannot tell with information provided.

Question 59

Table 5 -1. Steel Shelf Company

Refer to Table 5 -1. The Steel Shelf Company will break even with monthly production of units, and sales of dollars

A) 5,000; 250
B) 500; 10,000
C) 250; 5,000
D) 10,000; 500

Question 60

Table 5 -1. Steel Shelf Company

Refer to Table 5 -1. The Steel Shelf Company has a monthly break -even quantity of _ shelves.

A) 580
B) 500
C) 250
D) 1,1300
E) Cannot calculate with information provided.

Question 61

Table 5 -2. Jane's Dress Emporium

In a leveraged approach, a company will have

A) high variable costs.
B) a wide contribution margin.
C) low fixed costs.
D) none of the above.

Question 62

If a corporation's DOL is 3 then

A) for every 5 % change in sales, operating income will change by 15%.
B) every 10% change in sales operating income will change by 30%.
C) for every 1% change in sales, operating income will change by 3%.
D) all of the above.

Question 63

Bankruptcy petitions are filed initially in

A) state bankruptcy court.
B) U.S. federal bankruptcy court.
C) municipal court.
D) civil court.

Question 64

Chapter 7 bankruptcy

A) is known as fresh start bankruptcy.
B) requires liquidation of all of the assets of a company.
C) requires payment to the creditor.
D) all of the above

Question 65

A firm is experiencing an increase in variable costs. What can the firm do to maintain its profitability?

A) Increase its fixed costs to balance out its increased variable costs.
B) Decrease its fixed costs to break even sooner.
C) Raise its price to increase its contribution margin.
D) Lower its price to gain a greater market share.

Question 66

Which of the following holds true for the means test?

A) If the debtor's income is greater than the state's median income, he will have to take a means test.
B) The means test has been around for years.
C) Everyone will have to pass a means test.
D) The debtor has to be able to pay $200 per month for 5 years.

Question 67

Table 5 -2. Jane's Dress Emporium

The higher the DFL

A) the greater a company's earnings per share exceeds its operating income.
B) the greater a company's operating income exceeds its earnings per share.
C) the less the cost of financing to the company.
D) none of the above.