Operating and Financial Leverage Assignment Part 4

Chapter 05 - Operating and Financial Leverage 39. Degree of combined leverage considers the impact of a change in volume on the change in operating income. FALSE 40. Financial leverage breakeven occurs when return on total assets is equal to the cost of borrowed funds. TRUE 41. Increasing financial leverage will always lead to higher EPS because it reduces the number of shares outstanding. FALSE Multiple Choice Questions 42. The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation. A. fixed costs B. variable costs C. marginal costs D. semi-variable costs Chapter 05 - Operating and Financial Leverage 43. Which of the following questions does break-even analysis attempt to address? A. How much do changes in volume effect costs and profits? B. At what point does the firm break even? C. What is the most efficient level of fixed assets to employ? D. All of these 44. In break-even analysis, the contribution margin is defined as A. price minus variable cost. B. price minus fixed cost. C. variable cost minus fixed cost. D. fixed cost minus variable cost. 45. At the break-even point, a firm's profits are A. greater than zero. B. less than zero. C. equal to zero. D. Not enough information to tell Chapter 05 - Operating and Financial Leverage 46. If a firm has a break-even point of 40,000 units and fixed costs are $60,000, what will the firm's operating profit be at sales of 30,000 units? A. ($15,000) B. $30,000 C. $15,000 D. ($14,500) 47. If sales volume exceeds the break-even point, the firm will experience A. an operating loss. B. an operating profit. C. an increase in plant and equipment. D. an increase in stock price. Chapter 05 - Operating and Financial Leverage 48. The break-even point can be calculated as A. variable costs divided by contribution margin. B. total costs divided by contribution margin. C. variable cost times contribution margin. D. fixed cost divided by contribution margin. 49. A highly automated plant would generally have A. more variable than fixed costs. B. more fixed than variable costs. C. all fixed costs. D. all variable costs. 50. If fixed costs rise while other variables stay constant A. the breakeven point rises. B. degree of operating leverage increases. C. total profit declines. D. all of these Chapter 05 - Operating and Financial Leverage 51. If the price per unit decreases because of competition but the cost structure remains the same A. the breakeven point rises. B. the degree of combined leverage declines. C. the degree of financial leverage declines. D. All of these 52. If a firm has fixed costs of $60,000, a price of $7.00, and a breakeven point of 25,000 units, the variable cost per unit is: A. $5.00 B. $4.60 C. $5.40 D. $4.00 Chapter 05 - Operating and Financial Leverage 53. If a firm has fixed costs of $30,000, variable cost per unit of $.75, and a breakeven point of 5,000 units, the price is: A. $2.50 B. $6.75 C. $4.00 D. $4.50 54. If a firm has a price of $6.00, variable cost per unit of $4.00 and a breakeven point of 40,000 units, fixed costs are equal to: A. $27,000 B. $90,000 C. $80,000 D. $50,000 Chapter 05 - Operating and Financial Leverage 55. A firm with $49,000 in fixed costs breaks even on unit sales of 7,000, how many units must the firm sell to earn $30,000 in operating profits? A. 30,000 units B. 11,286 units C. 15,824 units D. There is not enough information to determine the unit sales required. Chapter 05 - Operating and Financial Leverage 56. A firm has operating profits of $15,000 on unit sales of 10,000 units. Fixed costs are $30,000. What is the firm's break-even sales level? A. less than 6,000 units. B. 6,000 units. C. more than 6,000 units D. There is not enough information to determine the unit break-even point. Chapter 05 - Operating and Financial Leverage 57. A firm's break-even point will rise if A. fixed costs decrease B. contribution margins increase C. price per unit rises D. variable cost per unit rises 58. Davison Toaster Corp. sells its products for $150 per unit. It has the following costs: The break-even point is A. less than 3,000 units B. 3,000 units C. more than 3,500 units D. not enough information has been provided to determine the break-even point. Fixed costs = $115,000 + $200,000 = $315,000 VC per unit = $20 + $6 = $26 Chapter 05 - Operating and Financial Leverage 59. Which of the following is true about the concept of leverage? A. at the breakeven point, operating leverage is equal to zero. B. combined leverage measures the impact of operating and financial leverage on EBIT. C. financial leverage measures the impact of fixed costs on earnings. D. none of these 60. A weakness of breakeven analysis is that it assumes: A. revenue and costs are a linear (constant) function of volume. B. prices and costs increase when the economy is strong and confidence is high. C. cost of goods sold goes up as revenue increases. D. there is no weakness. 61. A high DOL means: A. there are high labor costs. B. there is high debt. C. there is a large amount of equity. D. there are high fixed costs.