Fundamentals of Corporate Finance 3e Test Bank
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, then the fixed costs for the firm will be
$4,000 per year, with variable costs of $6 per clock. Otherwise the fixed costs will be $800,
with variable costs of $16 per clock. Above what level of expected sales should Ranbow Inc.
choose the high fixed cost alternative to maximize pretax operating cash flow?
A)
320 units
B)
352 units
C)
3200 units
D)
500 units
Ans:
A
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
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
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
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
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
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
84.
CoTres’s Brakes is introducing a new revolutionary brake-pad for vehicles 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, then what is the accounting operating profit break-even point for
the company?
A)
86 pairs
B)
28 pairs
C)
57 pairs
D)
68 pairs
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
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, then 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
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
86.
EpicSept is about to introduce a new employee monitoring tool and has determined that it will
charge $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. If EBIT Break-even is how the firm
evaluates its projects, then above what level of expected sales should EpicSept choose the high
fixed cost alternative?
A)
60 units
B)
90 units
C)
120 units
D)
180 units
Ans:
D
AICPA: Industry/Sector Perspective
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 sealed beam light is $50. The high-capacity machine has cash expenses of $10,000 per
month, while the other alternative has 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, then what are the depreciation expenses under the high-capacity
alternative?
A)
$3,000
B)
$4,000
C)
$9,000
D)
$5,000
A
Feedback:
Fundamentals of Corporate Finance 3e Test Bank
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 calculator is $70. The high-capacity machine has cash expenses of
$100,000 per month and depreciation and amortization expenses of $30,000 per month, while
the alternative has 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, then what is
the variable cost per unit under the high-capacity alternative?
A)
$10
B)
$47
C)
$60
D)
$70
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
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
Ans:
B
90.
Cino Inc. earned from its brake pads manufacturing unit revenue of $560,000 and depreciation
and amortization for the unit 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 of brake pad 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
C
EBIT = Revenue – VC – FC – D & A
$80,000 = $560,000 – ($60 × 5,600 units) – FC – $50,000
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Industry/Sector Perspective
91.
The management 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 non-recurring investments would be $18,928.
FCFt is $5,971.Compute the economic break even. (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
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
92.
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.
Fundamentals of Corporate Finance 3e Test Bank
93.
Soleon, Inc. had the following financial data for the fiscal year ending September 30, 2014.
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 pre-tax cash flow operating leverage during fiscal 2014?
A)
1.21
B)
1.46
C)
1.17
D)
1.85
Ans:
A
94.
Briefly discuss the advantages of knowing the economic break-even point.
stockholder value.
Fundamentals of Corporate Finance 3e Test Bank
95.
Discuss the differences between scenario analysis and sensitivity analysis.
