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Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?


A) leverage
B) risk
C) break-even
D) sensitivity
E) cash flow

F) B) and E)
G) C) and D)

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A company is considering a project with a cash break-even 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
D) $348,000
E) $353,000

F) C) and D)
G) B) and C)

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What is forecasting risk and why is it important to the analysis of capital expenditure projects? What methods can be used to reduce this risk?

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Forecasting risk is the possibility that...

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The accounting break-even production quantity for a project is 12,320 units.The fixed costs are $216,000 and the contribution margin per unit is $28.The fixed assets required for the project will be depreciated on straight-line basis to zero over the project's 5-year life.What is the amount of fixed assets required for this project?


A) $325,920
B) $644,800
C) $748,500
D) $1,080,000
E) $1,629,600

F) A) and B)
G) A) and C)

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A proposed project has a contribution margin per unit of $13.10, fixed costs of $74,000, depreciation of $12,500, variable costs per unit of $22, and a financial break-even point of 11,360 units.What is the operating cash flow at this level of output?


A) $0
B) $12,500
C) $62,309
D) $74,816
E) $86,500

F) A) and B)
G) A) and D)

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An analysis of the change in a project's NPV when a single variable is changed is called _____ analysis.


A) forecasting
B) scenario
C) sensitivity
D) simulation
E) break-even

F) None of the above
G) A) and B)

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Operating leverage is the degree of dependence a firm places on its:


A) variable costs.
B) fixed costs.
C) sales.
D) operating cash flows.
E) net working capital.

F) D) and E)
G) B) and C)

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An analysis which combines scenario analysis with sensitivity analysis is called _____ analysis.


A) forecasting
B) combined
C) complex
D) simulation
E) break-even

F) A) and B)
G) A) and E)

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Sensitivity analysis determines the:


A) range of possible outcomes given that most variables are reliable only within a stated range.
B) degree to which the net present value reacts to changes in a single variable.
C) net present value range that can be realized from a proposed project.
D) degree to which a project relies on its fixed costs.
E) ideal ratio of variable costs to fixed costs for profit maximization.

F) A) and C)
G) A) and E)

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The president of Global Wholesalers would like to offer special sale prices to the firm's best customers under the following terms: 1) The prices will apply only to units purchased in excess of the quantity normally purchased by a customer. 2) The units purchased must be paid for in cash at the time of sale. 3) The total quantity sold under these terms cannot exceed the excess capacity of the firm. 4) The net profit of the firm should not be affected. 5) The prices will be in effect for one week only. Given these conditions, the special sale price should be set equal to the:


A) average variable cost of materials only.
B) average cost of all variable inputs.
C) sensitivity value of the variable costs.
D) marginal cost of materials only.
E) marginal cost of all variable inputs.

F) B) and D)
G) A) and E)

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A project has earnings before interest and taxes of $14,600, fixed costs of $52,000, a selling price of $29 a unit, and a sales quantity of 16,000 units.All estimates are accurate within a plus/minus range of 3 percent.Depreciation is $12,000.What is the base case variable cost per unit?


A) $22.16
B) $23.84
C) $24.09
D) $24.23
E) $25.18

F) C) and D)
G) B) and D)

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Which of the following statements are identified with financial break-even point? I.The present value of the cash inflows exactly offsets the initial cash outflow. II.The payback period is equal to the life of the project. III.The NPV is zero. IV.The discounted payback period equals the life of the project.


A) I and II only
B) I and III only
C) II and IV only
D) I, II, and III only
E) I, III, and IV only

F) C) and D)
G) All of the above

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Assume you graph a project's net present value given various sales quantities.Which one of the following is correct regarding the resulting function?


A) The steepness of the function relates to the project's degree of operating leverage.
B) The steeper the function, the less sensitive the project is to changes in the sales quantity.
C) The resulting function will be a hyperbole.
D) The resulting function will include only positive values.
E) The slope of the function measures the sensitivity of the net present value to a change in sales quantity.

F) A) and E)
G) B) and D)

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Miller Mfg.is analyzing a proposed project.The company expects to sell 8,000 units, plus or minus 4 percent.The expected variable cost per unit is $11 and the expected fixed costs are $290,000.The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range.The depreciation expense is $68,000.The tax rate is 32 percent.The sales price is estimated at $64 a unit, give or take 3 percent.What is the operating cash flow under the best case scenario?


A) $148,247
B) $148,475
C) $107,146
D) $168,630
E) $174,220

F) All of the above
G) A) and D)

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A proposed project has fixed costs of $9,800, depreciation expense of $2,550, and a sales quantity of 2,100 units.The total variable costs are $5,607.What is the contribution margin per unit if the projected level of sales is the accounting break-even point?


A) $3.28
B) $4.07
C) $5.88
D) $6.16
E) $7.11

F) None of the above
G) C) and E)

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Which one of the following is defined as the sales level that corresponds to a zero NPV?


A) accounting break-even
B) leveraged break-even
C) marginal break-even
D) cash break-even
E) financial break-even

F) D) and E)
G) A) and C)

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You are considering a project that you believe is quite risky.To reduce any potentially harmful results from accepting this project, you could:


A) lower the degree of operating leverage.
B) lower the contribution margin per unit.
C) increase the initial cash outlay.
D) increase the fixed costs per unit while lowering the contribution margin per unit.
E) lower the operating cash flow of the project.

F) C) and E)
G) B) and D)

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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 rather than hiring part-time production employees
B) subcontracting portions of the project rather than purchasing new equipment to do all the work in-house
C) leasing equipment on a long-term basis rather than buying equipment
D) lowering the projected selling price per unit
E) changing the proposed labor-intensive production method to a more capital intensive method

F) B) and C)
G) B) and E)

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Brubaker & Goss has received requests for capital investment funds for next year from each of its five divisions.All requests represent positive net present value projects.All projects are independent.Senior management has decided to allocate the available funds based on the profitability index of each project since the company has insufficient funds to fulfill all of the requests.Management is following a practice known as:


A) scenario analysis.
B) sensitivity analysis.
C) leveraging.
D) hard rationing.
E) soft rationing.

F) A) and E)
G) A) and D)

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Your company is reviewing a project with estimated labor costs of $21.20 per unit, estimated raw material costs of $37.18 a unit, and estimated fixed costs of $20,000 a month.Sales are projected at 42,000 units over the one-year life of the project.All estimates are accurate within a range of plus or minus 4 percent.What are the total variable costs for the worst-case scenario?


A) $890,400
B) $1,561,560
C) $2,448,037
D) $2,451,960
E) $2,691,960

F) B) and C)
G) A) and D)

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