Ch12 Exam Questions Evaluating Project Economics

Fundamentals of Corporate Finance, 5e (Parrino)

Chapter 12 Evaluating Project Economics

1) Total variable costs for a firm do not vary directly with the number of units sold.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

2) A project with a higher proportion of fixed costs will have cash flows and accounting profits that are more sensitive to changes in revenues than an identical project with a lower proportion of fixed costs.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

3) Another term for pretax operating cash flow is EBIT.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

4) Distinguishing between fixed and variable costs will enable one to calculate the sensitivity of EBITDA to changes in revenue.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

5) The sensitivity of EBITDA to changes in revenue is higher than EBIT.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

6) Depreciation and amortization can be considered a fixed cost of the firm for accounting break-even purposes.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

7) Operating leverage is a measure of the sensitivity of net income to changes in revenue.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

8) The degree of pretax cash flow operating leverage will change as the levels of revenue change.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

9) If a firm's degree of accounting operating leverage is 1.12, then a 10 percent increase in revenue should result in a 12.0 percent increase in EBIT.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

10) Tunemony Craft has a degree of accounting operating leverage of 1.2. If EBIT increases by 24 percent, then the firm must have had a 20 percent increase in revenue if no other changes were involved.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

11) If The Tower of Pizza has a cash flow degree of operating leverage equal to 1.15, then a 20 percent increase in revenue should drive a 35 percent increase in pretax operating cash flow.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

12) Taxes do not enter into the equation for the degree of cash flow of operating leverage because both fixed costs and pretax operating cash flows are measured on a pretax basis.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

13) If there is no uncertainty regarding costs, volatility in pretax operating cash flows and accounting operating profits will be driven entirely by changes in revenue and operating leverage.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

14) Operating profits and operating cash flow describe the same item.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

15) A firm with zero fixed costs will have a degree of cash flow operating leverage equal to one.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

16) An increase in the proportion of a project's costs that are fixed will increase the degree of operating leverage for that project.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

17) Break-even analysis tells us how many units must be sold in order for a project to break even on a cash flow or an accounting basis.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

18) If a project fails to break even from a pretax operating cash flow perspective, then the firm is going to put more cash into the project to keep it going.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

19) The pretax operating cash flow (EBITDA) break-even point is the number of units that have to be sold in order to cover total fixed cost expenses.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

20) The per-unit contribution is defined as sales price less its total variable cost.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

21) The crossover level of unit sales is the level at which one fixed/variable cost combination of production will begin to generate higher levels of operating cash flows than another fixed/variable cost combination of production.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

22) The crossover level of unit sales can be calculated for any two project alternatives that employ the same level of operating leverage.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

23) The accounting operating profit (EBIT) break-even point is the numbers of units that must be sold to avoid an accounting operating loss.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

24) The accounting operating profit break-even points are smaller than the corresponding pretax operating cash flow break-even points for a project when costs are positive.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

25) An economic break-even point is the number of units that must be sold each year during the life of the project so that the difference of present value of cash inflows and cash outflows is one.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

26) The economic break-even point considers a single year rather than the entire life of the project.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

27) The economic break-even point focuses on the cash flows or profits from operations rather than after-tax free cash flows associated with the project.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

28) The NPV of a project will equal $0 when the present value of the annual FCFs from the project, equals the present value of net nonrecurring investments.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

29) An analysis in which a firm investigates the effect of a price change on the NPV of a project, holding all other variables and forecasts constant, is one type of sensitivity analysis.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

30) If a firm knows that a price change will have an effect on a number of other forecast variables, such as the sales forecast, then the firm might perform scenario analysis rather than sensitivity analysis.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

31) Within a simulation analysis, the firm will need to come up with some assumptions on the distribution of forecast inputs, such as the mean and variance of the sales forecast.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

32) Simulation analysis has the benefit of providing a pinpoint accurate forecast of a project's NPV.

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

33) Sensitivity analysis involves examining the sensitivity of the output from an analysis, such as the NPV, to changes in individual assumptions.

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

34) The economic break-even point focuses on the after-tax free cash flows associated with the project for its entire life.

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

35) EBITDA stands for:

A) earnings before interest, taxes, and amortized depreciation.

B) earnings before interest, taxes, depreciation, and amortization.

C) earnings before interest and taxes.

D) earnings before interest, taxes, dividend, and accrued expenses.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

36) Revenue minus variable and fixed costs is best described by:

A) EBIT.

B) EBITDA.

C) NOPAT.

D) EAT.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

37) Another name for EBITDA is:

A) pretax operating cash flow.

B) accounting operating cash flow.

C) net income before tax.

D) net income after tax.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

38) Compared to an identical project with a lower proportion of fixed costs, a project with a higher proportion of fixed costs will have:

A) a higher degree of sensitivity of EBITDA to a change in revenues.

B) a lower degree of sensitivity of EBITDA to a change in revenues.

C) no discernible difference of a change in sensitivity of EBITDA to a change in revenues.

D) a stable net income stream as a function of revenues.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

39) If a firm is planning to operate in an environment in which there will be a great deal of variability in the level of revenues, then the firm should:

A) structure its costs to have high fixed costs and higher total variable costs.

B) structure its costs to have high fixed costs and consequently lower per unit variable costs.

C) structure its costs to have low fixed costs and consequently higher per unit variable costs.

D) leave the cost structure unchanged.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

40) The degree of pretax cash flow operating leverage provides us with a measure of how sensitive:

A) pretax operating cash flows are to changes in revenue.

B) accounting operating profits are to changes in revenue.

C) NOPAT is to changes in tax rates.

D) accounting operating profits are to changes in tax rates.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

41) ________ is a measure of the sensitivity of EBITDA or EBIT to changes in revenue.

A) Total leverage

B) Financial leverage

C) Operating leverage

D) Combined leverage

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

42) Depreciation and amortization are treated like fixed costs:

A) in the calculation of the degree of pretax cash flow operating leverage.

B) in the calculation of the degree of accounting operating leverage.

C) for cash flow purposes.

D) for computing a dividend.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

43) If the degree of accounting operating leverage is 1.3 for a firm, then a 10 percent increase in revenue should drive a:

A) 12% increase in pretax operating cash flows.

B) 13% increase in EBIT.

C) 30% increase in EBIT.

D) 1.3% increase in pretax operating cash flows.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

44) Which of the following statements is true?

A) The degree of pretax cash flow operating leverage does not vary with different levels of revenue.

B) The higher the proportion of fixed costs to variable costs in a project, the greater the sensitivity of pretax operating cash flows to changes in revenue.

C) Depreciation and amortization are deducted to get pretax operating cash flows.

D) The lower the proportion of fixed costs to variable costs in a project, the more pretax operating cash flows will vary as revenue varies.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

45) The higher a project's operating leverage:

A) the lower the sensitivity of EBIT to changes in revenue.

B) the greater the sensitivity of EBITDA to changes in revenue.

C) the lower the sensitivity of net profit to changes in variable costs.

D) the greater the sensitivity of net profit to changes in variable costs.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

46) Which is the term used to define how many units must be sold for pretax operating cash flow to be equal to zero?

A) Pretax accounting operating profit break-even point

B) Pretax operating financial leverage break-even point

C) Pretax accounting sensitivity break-even point

D) Pretax operating cash flow break-even point

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

47) Which of the following differentiates accounting operating profit break-even point from pretax operating cash flow break-even point?

A) Accounting operating profit break-even point includes interest expense in the numerator, whereas pretax operating cash flow does not.

B) Pretax operating cash flow break-even point includes income taxes in the denominator, whereas accounting operating profit break-even point does not.

C) Accounting operating profit break-even point includes depreciation & amortization in the numerator, whereas pretax operating cash flow does not.

D) Pretax operating cash flow break-even point includes interest expense in the numerator, whereas accounting operating profit break-even point does not.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

48) The economic break-even point is the number of units that must be sold each year during the life of a project so that the NPV of that project equal to:

A) $0.

B) $1.

C) the present value of cash inflows.

D) the present value of investment.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

49) The difference between revenue and variable cost is called:

A) total contribution.

B) net profit.

C) EBIT.

D) EAT.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

50) Which of the following statements is true of the economic break-even point?

A) It is the number of units that must be sold for accounting operating profit to equal $0.

B) It is the level of unit sales at which cash flows or profitability for one project alternative switches from being lower than that of another alternative to being higher.

C) It is the number of units that must be sold each year during the life of a project so that the NPV of a project equals $0.

D) It is the number of units that must be sold for pretax operating cash flow to be $0.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

51) Sancore Inc. decided to invest in a project costing $35,000. It is assumed that all of $8,000 working capital will be recovered at the end of the project, which is four years. The opportunity cost of capital is 10%. Compute the present value of net nonrecurring investment of the project. (Do not round intermediate calculation, but round the final answer to the nearest dollar.)

A) $36,713

B) $40,464

C) $46,713

D) $35,657

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

52) Astroscope Tours finds that if it were to increase its price by 10 percent, it would have a 6 percent reduction in the NPV of its new 3-Hour Tour. Assuming other things are unchanged, Astroscope's analysis could be described as a:

A) Monte Carlo simulation.

B) break-even analysis.

C) sensitivity analysis.

D) variance analysis.

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

53) If a firm were interested in knowing the effect of a single input change on the net present value of a project, then the firm would most likely want to perform:

A) a Monte Carlo simulation.

B) a scenario analysis.

C) a sensitivity analysis.

D) a break-even analysis.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

54) If a firm were interested in finding the effect of a change in the variable cost per unit of production on the net present value of a project, then the firm might perform:

A) a sensitivity analysis.

B) a scenario analysis.

C) a Monte Carlo simulation.

D) a cash flow simulation.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

55) Which of the following describes the effect of changes in sets of interrelated variables?

A) A sensitivity analysis

B) A scenario analysis

C) A Monte Carlo simulation

D) A horizontal analysis

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

56) A firm is considering the effect of high inflation and low inflation environments on a project. In the high inflation environment, the price and costs per unit will be affected. If the low-inflation environment is considered as the baseline, then the analysis concerning the high inflation environment could be considered:

A) a sensitivity analysis.

B) a scenario analysis.

C) a Monte Carlo simulation.

D) a horizontal analysis.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

57) Scenario analysis can help a firm to:

A) understand the degree of uncertainty that a different set of circumstances affecting a project may hold.

B) eliminate all of the uncertainty that a different set of circumstances affecting a project may hold.

C) transform a risky project into a risk-free project.

D) understand the degree of certainty that a similar set of circumstances affecting a project may hold.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

58) If a project has an 80 percent probability of high demand and a 20 percent probability of low demand, then the expected value of the net present value under two different demand assumptions would give us a weighted average net present value for the project. Such an analysis is called:

A) a sensitivity analysis.

B) a scenario analysis.

C) a simulation analysis.

D) a horizontal analysis.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

59) An analysis in which each of the inputs and assumptions for a project takes on a separate assumed distribution whereby a computer draws on each of those inputs and assumed distributions to create a distribution for the NPV of the entire project is called:

A) a sensitivity analysis.

B) a scenario analysis.

C) a simulation analysis.

D) a horizontal analysis.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

60) Ottomony is considering an all-in-one retail center where the expected value of the NPV of the project has a distribution that yields a standard deviation of $25 million. Ottomony came to this conclusion by analyzing the individual input distributions for the project. This analysis is called:

A) a sensitivity analysis.

B) a scenario analysis.

C) a simulation analysis.

D) a horizontal analysis.

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

61) If a firm is interested in determining the distribution of the NPV for a project that it is considering, then the firm should be most interested in performing:

A) a sensitivity analysis.

B) a scenario analysis.

C) a simulation analysis.

D) a horizontal analysis.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

62) Which of the following mathematical expressions is used to calculate the degree of pretax cash flow operating leverage?

A) 1 + (FC/EBITDA)

B) 1 + (FC/EBIT)

C) 1 + [(FC + Depreciation and Amortization)/EBITDA]

D) 1 + [(FC + Depreciation and Amortization)/EBIT]

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

63) Which of the following project risk analyses is best able to analyze the effect of a change of a single input, holding other inputs constant, on the NPV of a project?

A) Sensitivity analysis

B) Scenario analysis

C) Simulation analysis

D) Horizontal analysis

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

64) Which of the following project risk analyses is best able to analyze the effect of a change of a single set of circumstances, with other correlated inputs, on the change in NPV of a project?

A) Sensitivity analysis

B) Scenario analysis

C) Simulation analysis

D) Contribution analysis

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

65) A change in the price of a product sold by a firm usually involves less units sold and a change in the product's cost structure. If a firm were interested in the entire price change effect on the project's NPV, then it would conduct:

A) sensitivity analysis.

B) scenario analysis.

C) simulation analysis.

D) contribution analysis.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

66) An analytical method that uses a computer to quickly examine a large number of scenarios and obtain probability estimates for various values in a financial analysis is known as:

A) risk analysis.

B) credit analysis.

C) capital structure analysis.

D) simulation analysis.

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

67) Which of the following mathematical expressions is used to calculate the degree of accounting operating leverage?

A) 1 + (FC/EBITDA)

B) 1 + (FC/EBIT)

C) 1 + [(FC + Depreciation and Amortization)/EBITDA]

D) 1 + [(FC + Depreciation and Amortization)/EBIT]

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

68) Sparran Craft had sales of $2.24 million last year for which the total cost was $2 million. If the firm had fixed costs of $600,000 on sales of 56,000 books, what is the firm's per-unit contribution? (Round the final answer to the nearest whole dollar.)

A) $20.00

B) $19.00

C) $15.00

D) $10.00

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

69) Oeta Works has a degree of pretax cash flow operating leverage of 1.25. If the firm's EBITDA was $1,000 last year while its depreciation and amortization expense was $50 in the same year, what was the firm's degree of accounting operating leverage?

A) 1.26

B) 1.30

C) 1.32

D) 1.35

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

70) Synthgration has a degree of pretax cash flow operating leverage equal to 1.266. If the firm's EBITDA was $1,500 last year while its depreciation and amortization expense was $100 in the same year, what was the firm's degree of accounting operating leverage?

A) 1.29

B) 1.33

C) 1.36

D) 1.39

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

71) Mussubsound Audotec Inc. had EBIT of $1,850 last year with fixed costs equal to $500 (depreciation and amortization not included) and depreciation and amortization equal to $150. What was Mussubsound Audotec's degree of accounting operating leverage?

A) 1.25

B) 1.35

C) 1.38

D) 1.40

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

72) Dupaudio Inc. had EBITDA of $3,000 and EBIT of $2,750, with fixed cash expense of $600 last year. What was Dupaudio's degree of accounting operating leverage?

A) 1.20

B) 1.25

C) 1.28

D) 1.31

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

73) Metkia Inc. had a degree of accounting operating leverage equal to 1.841 during the most recent period. If the firm's EBITDA was $4,800 and depreciation and amortization was equal to $600, what was Metkia's fixed cash expenses during the same period? (Round your answer to the nearest whole dollar.)

A) $1,548

B) $2,932

C) $2,324

D) $2,886

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

74) Ergotone Audio had a degree of accounting operating leverage equal to 1.60 during the most recent period. If the firm's EBITDA was $3,000 and its cash fixed costs were equal to $1,250, what was Ergotone 's depreciation and amortization expense during the same period? (Round the final answer to the nearest whole dollar.)

A) $344

B) $507

C) $377

D) $404

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

75) Resoneffect Inc. has a degree of pretax cash flow operating leverage equal to 1.12. If the firm's EBITDA was $2,000 last year while its depreciation and amortization expense was $150 in the same year, what was the firm's degree of accounting operating leverage? (Round the final answer to two decimal places.)

A) 1.09

B) 1.21

C) 2.09

D) 2.18

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

76) Silevector has a degree of pretax cash flow operating leverage equal to 1.341. If the firm's EBITDA was $2,500 last year while its depreciation and amortization expense was $200 in the same year, what was the firm's degree of accounting operating leverage? (Do not round the intermediate calculations. Round your final answer to two decimal places)

A) 2.54

B) 1.96

C) 1.46

D) 2.39

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

77) Treguard Inc. has total fixed costs of $8,500 per month. It sells rib plates for $15 each and the variable cost of providing each plate is $10. What is the pretax operating cash flow break-even point for Treguard?

A) 567 plates

B) 1,700 plates

C) 1,900 plates

D) 1,622 plates

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

78) SileCuatro has produced 22,000 tins in a year. The pretax operating cash flow (EBITDA) break-even point is 22,000 tins. If the fixed costs for the product is $1,500,000 and the variable cost per tin are $298, what price can SileCuatro charge per tin if the firm needs to break even on a pretax operating cash flow basis? (Round to nearest whole dollar.)

A) $366

B) $298

C) $268

D) $372

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

79) AchtTre has found that its pretax operating cash flow break-even number of glasses sold is 550,000 pairs. If each pair is sold for $15 and the variable cost per unit is $10, what is the amount of AchtTre's fixed costs?

A) $887,000

B) $1,558,000

C) $2,750,000

D) $1,582,000

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

80) Ranbow Inc. is about to introduce a new LED clock and has determined that it will charge $35 per clock. The firm must decide whether or not to purchase a high-capacity clock-making machine. If the high-capacity machine is selected, the fixed costs for the firm will be $4,000 per year, with variable costs of $6 per clock. A low-capacity clock-making machine alternative has the fixed costs of $800, and variable costs of $16 per clock. Above what level of expected sales should Ranbow Inc. choose the high-capacity clock-making machine alternative to maximize pretax operating cash flow?

A) 320 units

B) 352 units

C) 3,200 units

D) 500 units

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

81) Dreiphosis Corp. is in the process of determining whether to purchase a high-capacity machine to make textbooks for the upcoming school year. The high-capacity machine will generate fixed costs of $12,000 per year versus the $3,000 fixed costs of using a low-capacity machine. The variable costs per unit when using the high-capacity machine will be $33. The firm will charge $66 for each textbook and has determined that the high-capacity machine will maximize pretax operating cash flow if sales are greater than 1,000 books. What is the contribution margin under the low-capacity machine scenario?

A) $41

B) $24

C) $32

D) $46

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

82) ElecHuit Inc. is in the process of determining whether to purchase a high-capacity machine to make textbooks for the upcoming school year. The high-capacity machine will generate fixed costs of $11,000 per year versus the $2,500 fixed costs of using a low-capacity machine. The variable costs per unit when using the high-capacity machine will be $32. The firm will charge $62 for each textbook and has determined that the high-capacity machine will maximize pretax operating cash flow if sales are greater than 850 books. What is the variable cost per unit under the low-capacity machine scenario?

A) $25

B) $42

C) $35

D) $89

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

83) A cement contractor has determined that he will maximize pretax operating cash flow buying a large cement truck if he is able to sell more than 550 yards of cement per month. The price of a yard of cement is $62, and the variable costs for a large truck are $22 per yard. The variable costs for a small truck are $44 per yard, and the fixed costs for the small truck are $12,000. What are the fixed costs associated with the large truck?

A) $20,000

B) $12,000

C) $24,100

D) $35,000

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

84) CoTres's Brakes is introducing a new revolutionary vehicle brake pad that will never wear out. CoTres's will sell the pads for $150 a pair and they will cost $100 in variable costs to produce. If cash fixed expenses are $2,500 per year and the depreciation and amortization expenses are $900 per year, what is the accounting operating profit break-even point for the company?

A) 86 pairs

B) 28 pairs

C) 57 pairs

D) 68 pairs

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

85) Mexmagnet is introducing a new game system that promises to never become outdated. Mexmagnet will sell the systems for $225, and it will accrue $150 in variable costs to produce. If cash fixed expenses are $30 million per year and the depreciation and amortization expenses are $7.5 million per year, what is the accounting operating profit break-even point for Mexmagnet?

A) 621,000 units

B) 415,077 units

C) 200,000 units

D) 500,000 units

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

86) EpicSept is about to introduce a new employee monitoring tool which it will sell for $100 per unit. The firm must decide whether or not to purchase a high-capacity manufacturing machine. If the high-capacity machine is selected, then the cash fixed costs will be $5,000 per year, with variable costs of $50 per unit and depreciation and amortization expenses of $2,000. Otherwise, the fixed costs will be $2,000, with variable costs of $75 per unit and depreciation and amortization expenses of $500 for a low-capacity manufacturing machine. If EBIT Break-even is how the firm evaluates its projects, above what level of expected sales should EpicSept choose the high-capacity manufacturing machine?

A) 60 units

B) 90 units

C) 120 units

D) 180 units

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

87) Sechssonic has found that it is indifferent between purchasing a high-capacity vacuum sealing machine or a lower capacity machine as long as sales are 200 units per month. The price of each final product is $50. The high-capacity machine has fixed cash expenses of $10,000 per month, while the low capacity alternative has fixed cash expenses of $5,000 per month and depreciation and amortization expenses of $2,000 per month. Under high capacity, the variable costs per unit are $10; and they are $40 for the other alternative. If the firm bases its decisions on the accounting operating profit break-even, what are the depreciation and amortization expenses under the high-capacity alternative?

A) $3,000

B) $4,000

C) $9,000

D) $5,000

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

88) SeptSeven has found that it is indifferent between purchasing a high-capacity vacuum component assembly machine or a lower capacity machine as long as sales are 1,900 units per month. The price of each final product is $70. The high-capacity machine has fixed cash expenses of $100,000 per month and depreciation and amortization expenses of $30,000 per month, while the alternative has fixed cash expenses of $30,000 per month and depreciation and amortization expenses of $5,000 per month. Under the low-capacity alternative, variable costs per unit are $60. If the firm bases its decisions on the accounting operating profit break-even, what is the variable cost per unit under the high-capacity alternative?

A) $10

B) $47

C) $60

D) $70

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

89) OutCinq manufactures snow boards. The firm has fixed costs of $1,500,561. The snow boards sell for $235 each and have a variable cost of $92 each. What is the pretax operating cash flow break-even point for OutCinq? (Round to the nearest unit)

A) 9,566 units

B) 10,493 units

C) 11,565 units

D) 6,565 units

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

90) Cino Inc. earned revenue of $560,000 and depreciation and amortization for the year was $50,000. The company sells its product to customers at a price of $100. Further, the financial statement reveals that the EBIT for the year was $80,000. The variable cost for each unit is $60. What is the amount of fixed cost that leads to the EBIT as provided in the financial statement?

A) $88,000

B) $90,000

C) $94,000

D) $105,000

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

91) The management of Dior Corp. is planning to invest in a machine which has a four-year life. The initial investment of the project is $8,000, the annual addition to working capital is equal to $4,000. The fixed cost would be $4,000. The unit contribution margin is $15. The firm's marginal tax rate is 35%. The present value of net nonrecurring investments would be $18,928. FCFt is $5,971. Compute the economic break-even point. (Round your intermediate calculation to whole dollar amount and final answer to the nearest whole unit.)

A) 1,218 units

B) 1,305 units

C) 1,280 units

D) 1,880 units

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

92) Soleon, Inc. had the following financial data for the fiscal year ending September 30, 2021.

Sales $1,937,813

Depreciation and amortization $70,657

Fixed costs $132,456

Earnings before interest and taxes $564,441

Calculate the firm's degree of pretax cash flow operating leverage during fiscal 2021.

A) 1.21

B) 1.46

C) 1.17

D) 1.85

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

93) Briefly explain the difference between the degree of pretax cash flow operating leverage and the degree of accounting operating leverage. Also explain why someone might be interested in one or the other.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

94) Briefly discuss the advantages of knowing the economic break-even point.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

95) Discuss the differences between scenario analysis and sensitivity analysis.

Learning Objective: LO 5

Bloomcode: Analysis

AACSB: Analytic

IMA: Business Economics

AICPA: Global and Industry Perspectives

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