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Exam 5: Operating and Financial Leverage

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Question 31

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Use the below information to answer the following question. $\begin{array}{ll} \text {Sales (1,000 units) }&\$200,000\\ \text {Variable costs }&110,000\\\text { Contribution margin } & 90,000 \\\text { Fixed manufacturing costs } & 40,000\\\text { Operating income } & 50,000 \\\text { Interest } & 10,000\\\text { Earnings before taxes } & 40,000 \\\text { Taxes }(30 \%) & 12,000\\ \text {Net income }&\$28,000\\ \text {Shares Outstanding }&1,000\\\end{array}$ Refer to the table. The degree of operating leverage (DOL) is ________.

A) 1.62x
B) 1.80x
C) 3.50x
D) 1.40x

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Question 32

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If a firm with $49,000 in fixed costs breaks even on 7,000 units, how many units must the firm sell to earn $30,000 in operating profit?

A) 30,000 units
B) 11,286 units
C) 15,824 units
D) There is not enough information to determine the unit sales required.

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Question 33

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A high degree of operating leverage means

Use the below information to answer the following question. $\begin{array}{lr}\text { Sales }(100,000 \text { units }) & \$ 1,000,000 \\\text { Variable costs } & 300,000\\\text { Contribution margin } & 700,000 \\\text { Fixed manufacturing costs } & 200,000\\\text { Operating income } & 500,000 \\\text { Interest } & 75,000\\\text { Earnings before taxes } & 425,000 \\\text { Taxes }(30 \%) & 127,500\\\text { Net income }&\$297,500\end{array}$ Refer to the table. The degree of financial leverage is ________.

Firms with a high degree of operating leverage are

In order to conduct a cash break-even analysis, the analyst must add back depreciation from fixed costs.

The degree of combined leverage is the sum of the degree of operating leverage and the degree of financial leverage.

A highly automated plant would generally have

Use the below information to answer the following question. $\begin{array}{ll} \text {Sales (1,000 units) }&\$200,000\\ \text {Variable costs }&110,000\\\text { Contribution margin } & 90,000 \\\text { Fixed manufacturing costs } & 40,000\\\text { Operating income } & 50,000 \\\text { Interest } & 10,000\\\text { Earnings before taxes } & 40,000 \\\text { Taxes }(30 \%) & 12,000\\ \text {Net income }&\$28,000\\ \text {Shares Outstanding }&1,000\\\end{array}$ Refer to the table. This firm's break-even point in units is

Heavy use of long-term debt may be beneficial in an inflationary economy because

If a firm has fixed costs of $85,000, a variable cost per unit of $10 and sales price per unit of $15, what is the firm's breakeven point in units?

The difference between variable cost and fixed cost is that the cost amount fluctuates differently based on how many units are sold.

Cash break-even analysis

A weakness of break-even analysis is that it assumes

The use of financial leverage must consider both risk and maximizing profit.

Operating leverage emphasizes the impact of using fixed assets in the business.

When a firm employs no debt

Reducing the number of outstanding shares will always increase financial leverage since earnings per share will be higher, all else stays the same.

Contribution margin is equal to fixed costs minus variable costs.

Which of the following is true about the concept of leverage?