4) Betty Gilmore plans to sell berry pies at a local farmer’s market. The permit and space
rental will cost her $2,000 for the June through August season. The pies will sell for $7.00.
Ingredients and overhead average $4.00 per pie. She also has to pay ive percent of her
gross sales to the markets’s organizers. How many pies will she need to sell to cover her
ixed costs and realize a $3,000 proit?
A) 752
B) 1,667 pies
C) 1,887 pies
D) 1,250 pies
Question Status: New question
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk-Return Tradeof
5) The Oviedo Thespians are planning to present performances of their Florida Revue on 2
consecutive nights in January. It will cost them $5,000 per night for theater rental, event
insurance and professional musicians. The theater will also take 10% of gross ticket sales.
How many tickets must they sell at $10.00 per ticket to raise $1,000 for their organization?
A) 1000 tickets
B) 1,112 tickets
C) 1,223 tickets
D) There is not enough information.
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk-Return Tradeof
6) Accounting break-even analysis solves for the level of sales that will result in
A) IRR = Cost of Capital.
B) net income = $0.00.
C) Free cash low = $0.00.
D) NPV = $0.00.
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk-Return Tradeof
21
7) Accounting break-even analysis uses
A) free cash lows over the entire life of a project.
B) sales, variable costs and ixed costs over the entire life of a project.
C) sales, variable costs and ixed costs for a single period.
D) free cash lows for a single period.
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
8) February sales for Ted’s Variety Store equal $100,000, variable costs equal $60,000,
ixed costs, including depreciation of $20,000, total $60,000.
A) Ted’s Variety Store broke even with respect to net income.
B) Ted’s Variety Store broke even with respect to cash.
C) Ted’s Variety fell $20,000 short of cash break-even.
D) Ted’s Variety Store broke even with a $20,000 surplus.
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
9) Variable cost for Light.com’s luorescent tubes is $12.50, the tubes are sold over the
internet to businesses and organizations for $20.00 each. Fixed costs are $7,500,000. What
is the break-even quantity for the luorescent tubes?
A) 600,000
B) 1,000,000
C) 375,000
D) 7,500,000
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
22
10) Variable cost for Light.com’s luorescent tubes is $12.50, the tubes are sold over the
internet to businesses and organizations for $20.00 each. Fixed costs are $7,500,000.
$500,000 in depreciation expense is included in ixed costs. What is the cash break-even
quantity for the luorescent tubes?
A) 933,333
B) 1,000,000
C) 375,000
D) 1,066,667
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
11) Excom Fiberoptics is bidding on contracts to sell micro test tubes for biotechnology
research in sets of 1,000 tubes. Fixed costs including depreciation associated with the
project are $2,000,000, variable cost per set is $16. Excom expects to sell 250,000 sets.
What is the minimum price it can charge and reach the accounting break-even point?
A) $8
B) $12
C) $24
D) $20
Question Status: Revised
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
12) In the 4th year of project M, expected revenues will be $4,750,000, variable costs will
be $4,000,000, depreciation expense $180,000, and ixed cash costs $570,000. Which of
the following is true?
A) Accounting income equals $0.00
B) Free cash low equals $180,000
C) Free cash low equals 0
D) Both A and B are true.
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
23
13) Jake’s Tree farm is evaluating a proposal to plant 5,000 ornamental trees at an initial
cost of $10,000. The trees will be sold in 5 years. What is the minimum after tax cash low
from selling the trees that will allow the tree planting project to reach break even NPV?
Use a discount rate of 12%.
A) $12,000.00
B) $5,674.26
C) $17,623.42
D) $17,958.56
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
14) Miniature Molding is planning to introduce a valve for use in medical implants. Variable
costs per unit are $250. The maximum price MM could charge is $325. Fixed costs
associated with this product are $20,000,000. The worst case forecast calls for sales of
240,000 valves, the best case for 290,400. Will MM reach accounting break-even in the
worst case scenario?
A) Sales will fall short of break even by $8,666,667.
B) The product will exactly break even.
C) Sales will fall short of break even by $5,000,025.
D) Sales will exceed break even $58,000,000.
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
15) Miniature Molding is planning to introduce a valve for use in medical implants. Variable
costs per unit are $250. The maximum price MM could charge is $325. Fixed costs
associated with this product are $20,000,000. Depreciation expense of $2,500,000 are
included in ixed costs. The worst case forecast calls for sales of 240,000 valves, the best
case for $290,400. Will MM reach cash break-even in the worst case scenario?
A) Sales will fall short of cash break even by $8,666,667.
B) The product will exactly break even.
C) Sales will fall short of cash break even by $2,000,025.
D) Sales will exceed cash break even by $2,166,667.
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
24
16) Net present value break-even is reached
A) after the time period when NPV inally turns from negative to positive.
B) at the discount rate that produces an NPV of $0.00.
C) at the level of sales over the life of the project that results in free cash low of $0.000 for
a given period.
D) at the level of sales over the life of the project that results in an NPV of $0.00.
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
17) Garcia Developers will erect a small oice building at a cost of $4,500,000. They have a
client who will lease the space for 5 years at a price that will produce free cash lows of
$150,000 per year. For approximately how much would they need to sell the building for at
the end of the 5th year to reach break-even NPV? Garcia uses a discount rate of 10% for
projects of this type.
A) $3,750,000
B) $5,755,936
C) $6,331,530
D) $6,964,683
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
18) DNATECH has developed a hair growth treatment at a cost of $10 million. They can
license the technology to another company for a period of 10 years. What is the minimum
annual free cash low they could accept in order to reach break-even NPV on this product?
Use a discount rate of 8%.
A) $1,490,295
B) $1,639,324
C) $1,108,000
D) $1,000,000
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
25
19) Brookield Heavy Equipment is considering a project that will produce after tax cash of
$40,000 per year for 5 years. The project will require an initial investment of $144,191. At
what discount rate will the project reach break-even NPV?
A) 8%
B) 10%
C) 12%
D) 11.11%
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
20) Miller River Light is evaluating a project that will require an initial investment of
$350,000. Miller River uses a 12% discount rate for capital projects of this type. What level
of operating cash lows over a period of 5 years will cause the project to reach break-even
NPV? Assume cash lows come in the form of an end-of–the-year annuity.
A) $70,000.00
B) $97,093.41
C) $92,329.12
D) $86,690.54
Question Status: Revised
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
21) Project Zeta is expected to produce after-tax cash lows of $30 million in year 1, $40
million in year 2, and $50 million in year 3. If the company uses a 12% required rate of
return, what is the most it can invest in this project and break even with respect to NPV?
A) $69.03 million
B) $94.26 million
C) $1,11 million
D) $120 million
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
26
22) If Untel Inc. decides to manufacture a new generation of computer chips with a brief 2
year product life cycle, it expects to sell 1 million units each year. Variable cost per unit will
be $75, ixed costs $5 million, and depreciation $3 million. The initial investment will be
$22.91 million. Untel uses a discount rate of 10%; its marginal tax rate is 40%. To reach
break-even NPV, UNTEL must sell the chips for at least ________ each.
A) $87
B) $105
C) $100
D) $1,000
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
23) Charlestown Marina’s forecasts indicate that if slip rentals equal $500,000, net
operating income will be $25,000 and if rentals equal $525,000, net operating income will
be $37,500. What is Charletown‘s degree of operating leverage?
A) 2
B) 10
C) .05
D) .10
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
24) Chevre Imported Cheese Inc. forecasts that if sales revenue for next year is
$1,250,000, net operating income will be $100,000 and if sales revenue is $1,000,000, net
operating income will be $80,000. Chevre’s degree of operating leverage is
A) 2.
B) 10.
C) .5.
D) 1.
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
27
25) Gardner Furniture Co. has calculated its degree of operating leverage as 3.5. If
Gardner can increase sales revenue by 5%, net operating income should increase by
A) 15%.
B) 17.5%.
C) 1.43%.
D) 3.5%.
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
26) Break-even NPV means that the expected rate of return on a project is equal to the
required rate of return.
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
27) Dudster company’s DOL is 2. If sales increase by 10%, NOI will increase by 5%.
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
28) Accounting break-even means that the company is able to pay its interest expense and
also the dividends shareholders were expecting.
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
29) If the worst case scenario for a project results in an NPV of zero, the project should be
accepted.
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
30) A project’s internal rate of return and the company’s required rate of return were both
exactly 12%, therefore the project’s NPV was greater than $0.00.
Question Status: New question
Objective: 13.3 Use break-even analysis to evaluate project risk.
28
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
31) If a project reaches the accounting break-even point in every year of its life, it must
also have a positive NPV.
Question Status: New question
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
32) The NPV break-even point means that a company has covered its cost of capital.
Question Status: New question
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
33) For a line of snowblowers sold by Arctic Equipment, ixed costs, including depreciation
of $1,000,000, total $2,400,000. The snowblowers sell for $800 each. Variable costs of a
snowblower are $500. Compute
a. accounting break-even.
b. cash break-even
Question Status: Previous edition
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
29
34) Actual 2014 igures and forecasted 2015 igures are shown below for HEMOPath Labs.
Actual 2011 Forecast 2011
Sales $6,000,000 $6,480,000
Total Variable
Costs 3,600,000 3,888,000
Total Fixed
Costs 2,000,000 2,000,000
NOI ? ?
DOL
Compute Compute HEMOPath’s degree of operating leverage (DOL).
Question Status: Revised
Objective: 13.3 Use break-even analysis to evaluate project risk.
Keywords: break-even analysis
Principles: Principle 2: There Is a Risk–Return Tradeof
30