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AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-2
Section: 11.2
Topic: Simulation analysis
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-1
Section: 11.1
Topic: Forecasting risk
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-3
Section: 11.3
Topic: Variable costs
6. Fixed costs:
A. change as a small quantity of output produced changes.
B. are constant over the short-run regardless of the quantity
of output produced.
C. are defined as the change in total costs when one more
unit of output is produced.
D. are subtracted from sales to compute the contribution
margin.
E. can be ignored in scenario analysis since they are
constant over the life of a project.
Refer to section 11.3
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-3
Section: 11.3
Topic: Fixed costs
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-1
Section: 11.2
Topic: Sensitivity analysis
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-3
Section: 11.3
Topic: Marginal revenue
C. total cost.
D. scenario cost.
E. net cost.
Refer to section 11.3
A. variable costs.
B. fixed costs.
C. sales.
D. operating cash flows.
E. net working capital.
Refer to section 11.5
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-3
Section: 11.3
Topic: Marginal cost
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-4
Section: 11.5
Topic: Operating leverage
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-3
Section: 11.3
Topic: Accounting break-even
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-4
Section: 11.5
Topic: Degree of operating leverage
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-3
Section: 11.4
Topic: Cash break-even
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-5
Section: 11.6
Topic: Capital rationing
AACSB: N/A
Bloom's: Knowledge
11-2
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-5
Section: 11.6
Topic: Hard rationing
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-1
Section: 11.1
Topic: Forecasting risk
21. The base case values used in scenario analysis are the
ones considered the most:
A. optimistic.
B. desired by management.
C. pessimistic.
D. conducive to creating a positive net present value.
E. likely to occur.
Refer to section 11.2
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 11-1
Section: 11.2
Topic: Sensitivity analysis
23. When you assign the lowest anticipated sales price and
the highest anticipated costs to a project, you are analyzing
the project under the condition known as:
A. best case sensitivity analysis.
B. worst case sensitivity analysis.
C. best case scenario analysis.
D. worst case scenario analysis.
E. base case scenario analysis.
Refer to section 11.2
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 11-1
Section: 11.2
Topic: Sensitivity analysis
AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
category?
A. production department payroll taxes
B. equipment insurance
C. sales tax
D. raw materials
E. product shipping costs
Refer to section 11.2
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-1
Section: 11.2
Topic: Sensitivity analysis
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 11-2
Section: 11.2
Topic: Simulation analysis
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-1
Section: 11.2
Topic: Sensitivity analysis
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 11-3
Section: 11.3
Topic: Variable costs
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-2
Section: 11.2
Topic: Simulation analysis
AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 11-3
Section: 11.3
Topic: Variable costs
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-2
Section: 11.2
Topic: Simulation analysis
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 11-3
Section: 11.3
Topic: Marginal cost
AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 11-3
Section: 11.3
Topic: Accounting break-even
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 11-3
Section: 11.3
Topic: Marginal cost
AACSB: N/A
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-3
Section: 11.3
Topic: Accounting break-even
AACSB: N/A
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-3
Section: 11.3 and 11.4
Topic: Break-even levels
AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 11-3
Section: 11.4
Topic: Cash break-even
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 11-3
Section: 11.3
Topic: Accounting break-even
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 11-3
Section: 11.4
Topic: Cash break-even
AACSB: N/A
Bloom's: Comprehension
11-7
AACSB: N/A
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-3
Section: 11.4
Topic: Financial break-even
AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 11-3
Section: 11.4
Topic: Financial break-even
AACSB: N/A
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-4
Section: 11.5
Topic: Degree of operating leverage
50. You would like to know the minimum level of sales that
is needed for a project to be accepted based on its net
present value. To determine that sales level you should
compute the:
A. contribution margin per unit and set that margin equal to
the fixed costs per unit.
B. contribution margin per unit.
C. accounting break-even point.
D. cash break-even point.
E. financial break-even point.
Refer to section 11.4
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-3
Section: 11.4
Topic: Financial break-even
54. Which one of the following will best reduce the risk of
a project by lowering the degree of operating leverage?
A. hiring temporary workers from an employment agency
11-8
AACSB: N/A
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-4
Section: 11.5
Topic: Degree of operating leverage
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-5
Section: 11.6
Topic: Soft rationing
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-4
Section: 11.5
Topic: Degree of operating leverage
AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 11-5
Section: 11.6
Topic: Hard rationing
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 11-5
Section: 11.6
Topic: Soft rationing
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-1
Section: 11.2
Topic: Sensitivity analysis
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-2
Section: 11.2
Topic: Contribution margin
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-1
Section: 11.2
Topic: Sensitivity analysis
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
$68,000 = $69,000
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-1
Section: 11.2
Topic: Sensitivity analysis
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-1
Section: 11.2
Topic: Sensitivity analysis
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
D. $2,451,960
E. $2,691,960
Total variable costs = [($21.20 + $37.18) 1.05][42,000
0.95] = $2,445,830
D. $348,000
E. $353,000
FCcash break-even = 22,600 ($28 - $13) = $339,000
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-3
Section: 11.3
Topic: Cash break-even point
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-2
Section: 11.3
Topic: Scenario analysis
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-2
Section: 11.3
Topic: Scenario analysis
AACSB: Analytic
Bloom's: Application
Difficulty: Intermediate
Learning Objective: 11-3
Section: 11.3
Topic: Cash break-even
AACSB: Analytic
Bloom's: Application
Difficulty: Intermediate
Learning Objective: 11-2
Section: 11.3
Topic: Total costs
72. A company is considering a project with a cash breakeven point of 22,600 units. The selling price is $28 a unit,
the variable cost per unit is $13, and depreciation is
$14,000. What is the projected amount of fixed costs?
A. $325,000
B. $339,000
C. $342,000
11-12
or why not?
A. yes; The offered price is less than the marginal cost.
B. yes; The offered price is equal to the marginal cost.
C. yes; The offered price is greater than the marginal cost.
D. no; The offered price is less than the marginal cost.
E. no; The offered price is greater than the marginal cost.
Variable cost per unit = ($522,000 - $378,000)/1,800,000 =
$0.08 per unit
The marginal cost per unit will be $0.08 since the variable
cost per unit will be unchanged. The order should be
accepted since the offered price exceeds the marginal cost
per unit.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-3
Section: 11.3
Topic: Marginal cost
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-3
Section: 11.3
Topic: Accounting break-even
11-13
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-3
Section: 11.4
Topic: Cash break-even
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-3
Section: 11.4
Topic: Financial break-even
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-3
Section: 11.3
Topic: Accounting break-even
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-3
Section: 11.4
Topic: Cash break-even
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-3
Section: 11.4
Topic: Financial break-even
AACSB: Analytic
11-14
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-3
Section: 11.4
Topic: Financial break-even
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
Learning Objective: 11-4
Section: 11.5
Topic: Degree of operating leverage
88. You are the manager of a project that has a 2.8 degree
of operating leverage and a required return of 14 percent.
Due to the current state of the economy, you expect sales to
decrease by 7 percent next year. What change should you
expect in the operating cash flows next year given your
sales prediction?
A. 19.60 percent decrease
B. 16.03 percent decrease
C. 13.46 percent decrease
D. 5.60 percent decrease
E. 2.74 percent decrease
Percentage change in OCF = 2.8 (-0.07) = -0.196 = 19.60
percent decrease
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-4
Section: 11.5
Topic: Degree of operating leverage
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-4
Section: 11.5
Topic: Degree of operating leverage
Essay Questions
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 11-4
Section: 11.5
Topic: Degree of operating leverage
93. Mr. Bear, your boss, will only agree to accept a project
that, as a minimum, provides a rate of return equal to the
requirement he has set for the project. Given this, explain
how you can use break-even analysis to ascertain which
projects will be acceptable to him as you don't want to risk
hearing him growl if you waste his time presenting him
with a project that is unacceptable.
The financial break-even quantity is the sales quantity
required for a project to produce an IRR that equals the
required rate of return. Once this quantity has been
established and the values used in the computations
justified, you would also need to justify that the required
level of sales can be obtained.
91. What are the key features of the accounting, cash, and
financial break-even points?
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 11-1
Learning Objective: 11-3
Section: 11.4
Topic: Cash break-even
11-16
A. 6,970 units
B. 10,030 units
C. 17,000 units
D. 21,470 units
E. 23,970 units
QAccounting break-even = ($17,000,000 + $6,970,000)/($5,000 $4,000) = 23,970 units
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 11-7
Learning Objective: 11-3
Section: 11.3
Topic: Accounting break-even
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 11-2
Learning Objective: 11-3
Section: 11.3
Topic: Marginal cost
AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
EOC #: 11-6
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
EOC #: 11-17
Learning Objective: 11-1
Section: Analysis
Topic: Sensitivity analysis
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 11-11
Learning Objective: 11-4
Section: 11.5
Topic: Degree of operating leverage
11-18
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
EOC #: 11-19
Learning Objective: 11-2
Section: 11.2
Topic: Scenario analysis
AACSB: Analytic
Bloom's: Analysis
Difficulty: Intermediate
EOC #: 11-20
Learning Objective: 11-2
Section: 11.2
Topic: Project IRR
AACSB: Analytic
Bloom's: Evaluation
Difficulty: Intermediate
EOC #: 11-24
Learning Objective: 11-3
Section: 11.4
Topic: Break-even analysis
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AACSB: Analytic
Bloom's: Evaluation
Difficulty: Intermediate
EOC #: 11-23
Learning Objective: 11-3
Section: 11.4
Topic: Break-even analysis
11-20