Deck 14: A: Capital Structure Management in Practice

Question 1

Another name for breakeven analysis is:

A)cost-volume-profit analysis
B)graphic analysis
C)EBIT-EPS analysis
D)degree of operating leverage

Answer 1

A

Question 2

The Foggy Futures Weather Network offers an annual almanac for sale each year with information about predicted weather patterns, severe storm safety tips and a tracking chart.The finished product sells for $35 with a variable cost per unit of $21.The company has operating costs of $1,050,000.What is the firm's breakeven point in units?

A)75,000
B)50,000
C)80,000
D)65,000

Answer 2

A
Explanation: 1,050,000/(35 - 21) = 75,000

Question 3

What are the possible uses for breakeven analysis?

Answer 3

Breakeven analysis can be used for:
1.forecasting the profitability for a firm, division, or product line, given a cost structure and expected sales level.
2.analyzing the impact of changes in fixed costs, variable costs and selling price on operating profits.
3.analyzing the impact of substituting fixed costs for variable costs in a production process.
4.analyzing the profit impact of a firm's restructuring efforts designed to cut fixed costs.

Question 4

The Foggy Futures Weather Network offers an annual almanac for sale each year with information about predicted weather patterns, severe storm safety tips and a tracking chart.The finished product sells for $35 with a variable cost per unit of $21.The company has operating costs of $1,050,000.Using 100,000 units as a base, what is the degree of operating leverage?

A)6.2
B)5.7
C)7.9
D)4.0

Question 5

The uses of breakeven analysis are all of the following EXCEPT:

A)forecasting the profitability of the firm
B)forecasting the impact of certain economic conditions on the firm's profitability
C)analyzing the impact of substituting fixed costs for variable costs in production
D)analyzing the profit impact of a firm's restructuring efforts.

Question 6

The Foggy Futures Weather Network offers an annual almanac for sale each year with information about predicted weather patterns, severe storm safety tips and a tracking chart.The finished product sells for $35 with a variable cost per unit of $21.The company has operating costs of $1,050,000.The company has operating costs of $1,050,000.What is the firm's breakeven point in dollars?

A)$1,750,000
B)$4,670,000
C)$2,625,000
D)$3,875,566

Question 7

Breakeven analysis is normally performed for a planning period of:

A)five years
B)one year or less
C)ten years
D)one month

Question 8

The breakeven point occurs where total revenues intersect with:

A)market returns
B)the risk-free rate
C)total costs
D)total interest and taxes

Question 9

Breakeven analysis can be used:

A)when planning renovations
B)when planning expansions
C)when planning financial resources
D)when planning new product development

Question 10

What is the breakeven point for Rough and Tough Clothiers, makers of heavy duty dungarees? They have the following costs:
Raw materials: $15 per pair
Labor costs: $ 8 per pair
Commissions: $ 2 per pair
Utilities: $ 50,000
Rent: $ 96,000
Taxes: $ 30,000
Salaries: $150,000
The price of the dungarees is $55 per pair.

A)13,040
B)10,867
C)25,000
D)17,650

Question 11

In a graphic breakeven analysis, the point where total revenue is less than total cost indicates that the firm has:

A)net operating capital
B)cash flow from investing
C)a negative EBIT
D)a positive return on capital

Question 12

Bouncy Bungee Rubber Band Company is trying to determine its probability of incurring a loss.Its fixed costs are $2,760,000 per year, it sells its rubber bands for $3.75 per pack and the variable cost of these packs is $.75.They estimate they will sell 1,000,000 packs this year and they have a standard deviation of 40,000 units.(A normal distribution table - Table V - must accompany this problem).

A)3.22%
B)6.71%
C)5.48%
D)2.87%

Question 13

The difference between the selling price per unit and the variable cost per unit is the:

A)contribution to the bottom line
B)contribution to revenue
C)contribution margin
D)contribution to EBIT

Question 14

The Fanny Nanny Weight Monitors Corporation offers an annual diet plans for sale each year with information about nutrition, diet tips and food substitutes.The finished product sells for $60 with a variable cost per unit of $27.The company has fixed operating costs of $1,250,000.What is its breakeven point?

A)22,187
B)37,879
C)56,124
D)48,961

Question 15

Kettle of Fish Hatcheries provides a stocked pond for fishing enthusiasts.They have fixed costs of $525,000, they charge $50 per person for pond access and the variable costs of stocking the pond average about $15 per person.How many people need to fish the pond annually to break even?

A)45,000
B)15,000
C)32,000
D)10,000

Question 16

An example of a noncash outlay is:

A)property
B)marketing costs
C)advertising
D)depreciation

Question 17

Breakeven analysis can be used to assess risk.

A)financial
B)operating
C)sales
D)volume

Question 18

What is the breakeven point in dollars for Zippy Dippy Swimwear, makers of bathing suits and accessories? They have the following costs:
$$\begin{array} { l l } \text { raw materials: } & \$ 25 \text { per bathing suit } \\& \$ 8 \text { per towel } \\& \$ 16 \text { per beach umbrella } \\& \$ 37 \text { per swimsuit cover-up } \\& \$ 18 \text { average per suit } \\& \$ 10 \text { per umbrella } \\& \$ 3 \text { per towel } \\\text { labor costs: } & \$ 20 \text { per cover-up } \\& \$ 12 \text { per item } \\& \$ 150,000 \\& \$ 196,000 \\\text { commissions: } & \$ 230,000 \\\text { utilities: } & \$ 550,000 \\\text { rent: } & \text { taxes: } \\\text { salaries: } & \text { The price of each suit is } \$ 85 . \\\text { The price of each towel is } \$ 25 . \\\text { The price of each umbrella is } \$ 40 . \\\text { The price of each cover-up is } \$ 81 .\end{array}$$

A)$3,172,024
B)$4,947,196
C)$7,887,259
D)$6,425,583

Question 19

The Foggy Futures Weather Network offers an annual almanac for sale each year with information about predicted weather patterns, severe storm safety tips and a tracking chart.The finished product sells for $35 with a variable cost per unit of $21.The company has operating costs of $1,050,000.What is the probability of the firm having operating losses if the firm has a standard deviation of 4,000 units and the firm expects to sell 80,000 almanacs? (A normal distribution table - Table V - must accompany this problem)

A)10.56%
B)11.12%
C)14.92%
D)13.57%

Question 20

The contribution margin per unit is the difference between:

A)the selling price per unit and fixed costs
B)the fixed costs and the variable costs
C)the variable cost per unit and the selling price per unit
D)the variable costs and the number of units sold

Question 21

Explain the composition of operating costs and why they can cause an inaccurate breakeven analysis.

Question 22

List the limitations of breakeven analysis:

Question 23

How can a firm have more than one breakeven output point?